With Profits Bonds | Life With Profit Investments Bonds

Bonds

With Profits Investment Bonds

With-profit bonds became popular in the 1990s and were still selling strong well into the early part of this decade.

However, sales of such bonds have dipped in recent times to a mere trickle today. This gives us a clue as to their current status!

With-profit bonds were popular with savers because they appeared to offer the golden solution to many savers requirement: a high, steady return from a low risk investment. The average investor normally looks for two things above all others when it comes to choosing an investment. The first is security, the second is income.

Life With Profit bonds were created by insurance companies from the overwhelming success of endowment plans. The companies decided that the same principles that lay behind endowment savings: regular bonuses, smoothed out over many years, could be applied to lump sum bonds. In addition many savers who had paid into endowment plans to clear their mortgages over many years were seeing these with profit plans mature with very high maturity values. And because these same savers had often managed to pay off their mortgages through other means the Insurance companies could offer bonds as an immediate alternative to reinvest the money into.

Let us not beat about the bush, sales of with-profit bonds were fantastically successful throughout the period when they were sold. They became the best selling product in many insurers’ product portfolios. And it must be said that they performed extremely well in their formative years.

Yet they were flawed. What they were constructed to do, they did very well during the golden years of upwards movements in markets throughout the period from 1987 to 2002. They did everything they were expected to do: they produced regular bonuses year after year and smoothed out the returns for investors. However 9/11 and the resulting stock market downturn soon changed this. Before you could say “MVR” without realising it many investors suddenly saw their Bonds hit with high, rapidly introduced penalties.

Many investors it is said did not even know such penalties could be applied in such a stark and arbitrary fashion. But penalties were applied and often at rates of 20%+ of the plan value. Worse still many insurers applied penalties AND slashed bonuses. There are companies around today with frightening sums invested into them that haven’t paid a bonus since 2002! Six/seven years of zero return.

This is where differentiation between different companies becomes important because some companies have maintained competitive returns and some haven’t. Some have applied very high penalties and some have been more lenient. Some have valuable guarantees, which can help investors get out of their bonds with no penalties, some don’t have any guarantees.

As with all such plans it is impossible to generalise. One thing is for sure however, the small print on these bonds is very important and it is the view of the authors of this site that every single investor with a with-profit bond should at the very least get an audit of their investment bond. Such an audit should identify: what the current market value of the bond is; what the surrender value is; what the past bonus history has been; what the prospects for future bonuses are; what guarantees are on the bond and when do they apply and what the alternatives are should an investor decide to exit.

We are worried that too many investors get stuck with their bond, simply because these facts, easily obtainable and easily assessable by a competent Independent Financial Adviser (IFA), are not understood. This is why we offer an audit service via one of our regional affiliate IFAs. To get such an audit simply visit our enquiry centre and fill out the request for an audit and we will get back to you with the requisite report.

We’re back to 2002 all over again: stockmarkets have tanked, interest rates are being slashed and no asset class of any significance offers anything remotely akin to a decent return. Therefore, the bonds have fallen back to the same state: high penalties and little prospect of any sort of future return.

The simple fact is this: with-profit investment bonds work in good market conditions and struggle when the going gets tough and this is the rub, they were sold as the investment for all seasons, when in fact they leave you in the rain without an umbrella when it starts to pour.

Exiting a with-profit bond must make sense for many investors who really do want a steady return from a low risk investment rather than a low return or no return from a risky investment.

The information on this website is to be viewed as general information and does not constitute advice. Views and opinions expressed are those of the individual contributors. Individuals reading the site should not rely on any of the information contained within the site in making any decisions. DMP Marketing cannot be held responsible for any liability suffered by any individual as a result of information contained within the site. In the event that advice or help is required then independent advice should be sought from a regulated independent adviser.