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Working Lunch Thursday, 29 May, 2003, 12:28 GMT 13:28 UK
Losing on with-profits

What's in a name?

Well, when you're talking about with-profits policies, it's easy to get confused.

A big misconception is that they come with profits.

Unfortunately, despite their name, the policies can often have no profits.

That's led to a number of Working Lunch viewers getting in touch.

  • Bill Drysdale is disgusted at getting no bonus
  • Ian Dick says he was told they would do well and haven't
  • Brian Fenner is annoyed at the withdrawal penalties
  • Roy Owen is angry at the lack of a bonus.

    The idea of with-profits policies is that they smooth the returns you get from investments.


    So instead of zooming up and down every time the FTSE moves, you get a more predictable performance.

    This is how it works. You put money into the fund which is invested in shares, property or bonds and which goes up and down according to how well the investments do.

    But every year part of the profit is banked so that if the market suddenly falls, you can keep the banked profits.

    Now, that's nice because it means you are not risking everything all the time.

    As you make profits, you can safeguard some of them. It sounds a brilliant idea.

    But it's not as easy as that. Because if the market falls, those profits which you thought were safe aren't really safe at all.

    Pull the plug

    And the fund managers can pull the plug on your fund if you decide to cash it in.

    That's because of something called the MVA or Market Value Adjuster.

    Companies don't want people taking their money and running or there'd be nothing left.

    So they can dip into your accumulated profits and take them back.

    If you want to cash in your policy, you'll now find that there are stiff penalties.

    So much for making profits safe.

    Another problem is that it's not always possible to work out if your investment is on target.

    Each year, with-profits policyholders hope to get an annual bonus, which reflects the amount of profit the fund has made.

    Typically the rate might be around 5-6%.


    But the final bonus paid at the end of the policy term - which can be after 25 years of investing - could be worth at least 50%.

    The size of the bonus depends on the attitude of the fund manager in that particular year and how the investments have done then.

    That can be a big risk to take.

    Anna Bowes
    Anna: Policies have done their job

    So if the profits aren't safe and so much of what you get relies on what happens in the year you cash it in, what's the point of a with-profits policy?

    "There is a problem if people need their money now because the MVAs do apply to most policies at the moment," says Anna Bowes from the financial advisers Chase de Vere.

    "But they should have been aware of the possibility of an MVA applying when they took the policy out.


    "Hopefully they can let it run on until a time when the MVAs don't apply; it could be an anniversary date, for example, when you can actually get to your money without an MVA.

    "But the fact is that your with-profits policy has probably done its job - it's just not providing as great a return as you may have expected three of four years ago."

    So there is clearly a place for with-profits policies.

    But they can have big drawbacks as well, and as with all these things, they are not easy money.

    Despite the name, you can lose money as well as make it.

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