Secrets of Success: Pick well and with-profits can still work
Saturday 09 April 2005
For those of you with the stomach for getting into detailed statistical study of investment returns, there are some interesting figures to be extracted from the latest annual survey of with-profits endowment policies by the trade magazine
For those of you with the stomach for getting into detailed statistical study of investment returns, there are some interesting figures to be extracted from the latest annual survey of with-profits endowment policies by the trade magazine Money Management. They remind us about what is good and what is bad about the whole with-profits concept.
If you go solely by the headlines in the press, you will surely believe that with-profits as a concept is dead. Bonus rates and realised values for with-profits policies have been falling for years. Each year seems to bring fresh announcements of cuts. Worse still, some providers continue to levy a surrender penalty - euphemistically called a market value adjustment - if you try to take your money out before your policy has matured. Since the Equitable scandal broke five years ago, sales of with-profits policies have plummeted. Few financial advisers have the nerve to recommend them any more.
But in practice, however, the real picture about with-profits is not quite as simple as the headlines would have you believe. Millions of investors do still have their money tied up in with-profits policies that they rightly feel unable to abandon, if only because they also recognise there is no guarantee they would do any better by switching.
And while it is true that the whole concept of with-profits has taken a critical lambasting and has now in many respects become outdated, the performance record is not as uniformly bad as popular opinion would have you believe.
Take the level of returns recorded on maturing with-profits endowments as an example. The sums realised on these policies have certainly been falling. The average 10-year with-profits endowment policy maturing in February 2005, for example, produced a pitiful annual average rate of return of 2.7 per cent, just 0.1 per cent above the rate of inflation over the same period. Until five years ago, by comparison, the annual yield on 10-year with-profits policies was consistently between 9 and 10 per cent a year. The comparable figures for the average 25-year endowment - the kind most people use to support their mortgages - are nothing like as bad. But they too have fallen from a realised annual return of 12.4 per cent on policies maturing 10 years ago to 9.1 per cent for those maturing in February this year, a decline of around 25 per cent in five years.
However, there are two important caveats. One is that these are nominal, not absolute returns. If you take inflation into account, the picture changes. As the second chart shows, the downward trend is much steeper for 10-year endowments, but much less marked for the longer 25-year policies. While the average 10-year policy's realised yield has fallen from five per cent to zero, the comparable figure for 25-year policies is actually higher (at 4.5 per cent a year) than it was 10 years ago.
The second thing to emphasise is that the average figures conceal an extraordinarily wide range of performance by individual providers. The second chart shows the best and worst inflation-adjusted returns achieved in both the 10-year and 25-year endowment sectors. You can see that the best providers have paid out consistently good returns of more than six per cent a year in real terms, while the worst have been terrible, especially for shorter term policies.
The figures provide ammunition for both critics and supporters of the with-profits concept. The performance of many with-profits policies has been bad, something that can be attributed both to their relatively high costs and the indifferent investment performance of many life companies. In reality the with-profits concept, with its aim of smoothing returns through the stock and bond market cycles, only works as a long-term investment.
In up and down markets, 10 years is simply too short a period to allow smoothing to work in a cost-effective way. That is why the figures for 10-year policies are so much more volatile and unimpressive than their 25-year equivalents. The reason so many financial advisers continued for many years to push their clients into 10-year with-profits products may not be unrelated to the handsome upfront commissions life companies pay on these policies.
On the other hand, there is nothing wrong with the impressive rates of return that the best with-profits endowments have produced over time. A realised average real return of five to six per cent a year represents a more than acceptable return, particularly for the cautious investors at whom with-profits have historically been directed. Most sensible people, if offered such a return over 25 years, should grab it with open arms.
The paradox is that the longer you set out to invest for, the more important it becomes to pick a provider that you can trust to invest your money competently and cost-effectively over such a long period. This is tough and the job is more difficult because new technology has completely outmoded the old way of doing things.
The with-profits industry has failed to demonstrate that it merits the trust of investors. This overshadows the fact that a well-run low-cost smoothed investment fund is of itself a perfectly sound investment concept that can still deliver something of value to the lucky minority who pick wisely.
- 1 Toddler throws a tantrum at the White House – in front of Barack Obama
- 2 Irish people are travelling home from all over the world so they can vote to legalise gay marriage
- 3 Picture of couple posing with beached dolphin 'that later died' causes outrage
- 4 16-year-old girl beaten and burned alive by lynch mob in Rio Bravo, Guatemala
- 5 Witch doctor arrested after forcing newborn baby to walk in Indian village
As a white man, I'm surprised more women aren't tweeting the hashtag #KillAllWhiteMen
Scotland may have to leave the EU even if it votes to stay in, David Cameron confirms
Report finds that Britain's wages are the most unequal in Europe
The day that Britain resigned as a global power
Almost a third of school pupils believe 'Muslims are taking over our country', study claims
Gay marriage 'Bert and Ernie' cake bakery found guilty of discrimination in Northern Ireland
iJobs Money & Business
£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...
£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...
£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...
£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...
Day In a Page
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof