Julian Knight: Don't be lulled into thinking that with-profits policies are safe

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The Independent Online

Legal & General has proudly announced that its sales of with-profits policies are up 167 per cent in the past year. Bully for them. But what are we to read into this? Are the much-maligned with-profit funds somehow rehabilitated in the public eye? I don't think so.

Any uptick in popularity is due to investors having an appetite for anything marketed as a "safe" investment. All around them, from unit trusts to savings accounts, they see danger and the potential for big losses, so the "smoothing" concept at the heart of with-profits undoubtedly has appeal. Providers pledge that some of the growth in good years will be held over to pay returns in bad years.

But close observers know "smoothing" has usually turned out to be spin. Providers have reacted to bad times on the market by slashing annual and terminal bonuses and, most recently, imposing market value adjusters – in effect, penalties on investors wanting to get access to their own cash.

With-profits are a million miles from being a safe investment. They lack transparency, have arcane rules and sometimes high charges. What's more, they are sold by commission- hungry financial advisers. If these funds were so great, providers would not have to provide these incentives.

So if you're offered a "safe" with-profits policy, take a long look at the small print, understand that smoothing rarely pays off and ask the adviser what they are getting from the deal.

Retirement schemes in peril

Like everyone else, I was reminiscing about Woolies last week. As a schoolboy, I used the local branch to shelter from the rain as I waited for the bus home. It was great killing time by gazing at the top 40 singles while munching on pic 'n' mix.

But one less happy legacy of Woolworths is the black hole in its pension scheme, estimated at around £100m. If the worst happens, its staff will be able to rely on the Pension Protection Fund for their cash.

However, while the PPF is a great idea in principle – funds pay an annual levy that provides a safety net for members if schemes go under – it hasn't been tested in the face of a recession. Although it should be able to deal with Woolies, I fear the round of business failures over the next few years could undermine the PPF.

The call on existing schemes to support failing ones may be so great that yet another round of government funding is needed to prop up the PPF. It is only a theory at present but the workplace pension system is desperately weak and Woolies' demise could be the start of something much worse.

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