We're all Bond fans now

We may be stampeding to buy long-term investments. But will we be able to stay the course?

Investors are once again pouring money into insurance-linked investment products and pensions sold by insurance companies. However, for some savers these products may not make sense because many people are likely to end up cashing in policies early or stopping regular contributions.

Investors are once again pouring money into insurance-linked investment products and pensions sold by insurance companies. However, for some savers these products may not make sense because many people are likely to end up cashing in policies early or stopping regular contributions.

Britain's biggest insurance company, the Prudential, and one of its highest profile rivals, Norwich Union, this week both announced spectacular growth figures for new business, especially for the sale of insurance-linked investment products. In the UK, Prudential generated £5.9bn worth of new business from its combined life assurance, pensions and investment business, an increase of 66 per cent on the same period last year. Even without the acquisition of M&G, the fund managers, the increase would still have been 55 per cent.

Over at Norwich Union, the increase in the UK was 41 per cent for the same kind of products. These two companies will be among the best performers in the industry, but many other insurers are set to report impressive growth in business this year.

There has been a steady increase in new pension business, but by far the biggest driver of this surge is coming from investment business, especially "with-profit" and unit linked bonds (together known as investment bonds), but also the purchase of annuities, unit trusts, and individual saving accounts (ISAs). For investment bonds, both the Prudential and Norwich Union had increases in "regular premium" investment policies under which the saver signs on to make regular contributions. But the real surge has come in single premium policies, where the policy-holder invests a lump sum. Both insurance companies saw such products jump to almost 40 per cent of their total new UK business so far this year.

These single premium investment bonds include unit linked bonds and traditional "with-profit" bonds, such as the Prudence Bond, or combinations of the two.

The rush of money has come mainly from investors who are dissatisfied with the current low interest rates available on conventional savings accounts. With-profit bonds are taking a big slice of the new business. These are traditional insurance company products invested by the insurers in a range of assets from cash to bonds, shares and property over periods of up to 10 years. They earn annual bonuses based on the success of the investments, but these are "smoothed out" by the insurers in order to iron out the bigger fluctuations in the underlying value of the investments. Most reinvest any income in the fund to increase the eventual pay-out but investors can cash in units to generate regular incomes of up to 6.5 per cent a year. Any potential tax liability is deferred on withdrawals of up to 5 per cent each year.

One complaint about investment bonds is that they are not transparent, and investors must rely entirely on the good faith and expertise of the insurance company. Another potential problem is that these are offered as long-term investment vehicles, and can prove costly for those who cash in policies early or discontinue regular payments. All type of investment bonds are designed to be held for some time, usually five to 10 years. The charges are mostly levied up-front to pay commission. This means an investor would only get upwards of 90 per cent of his or her money back if cashing in a policy after only three months.

This is a problem which is already evident with pension policies and endowment policies sold in the late Eighties and early Nineties and which have been lapsed. According to the Personal Investment Authority (PIA), 30 per cent of all those regular premium policies lapsed within their first four years and left policyholders significantly out of pocket because of the up-front charges. The latest set of figures, published this month and referring to policies taken out in 1994, showed little or no improvement in the lapse rate.

Perhaps half of all discontinued policies lapse because of personal difficulties, such as divorce and unemployment. But as late as 1994 there also remained a rump which arose because of the aggressive salesmanship of unsuitable policies and the targeting of individuals in insecure employment. This accounted for the differences between the best companies, whose lapse rate was only around 20 per cent of sales, to the chief offenders, whose rates reached 40 per cent.

The PIA is hopeful lapse rates will fall sharply when the 1996 figures are published in two years. The benefit from the massive publicity campaign to end the worst cases of mis-selling should some through. Plans to introduce stakeholder pensions with low charges will also help to set new standards for the industry and ensure better value.

Your questions answered

Why is so much money being invested this year in insurance-linked investment products such as "with-profits" bonds and unit-linked bonds? These two types of products, together known as investment bonds, are sold by insurance companies and at present offer better returns than the low rates available from banks and building societies.

How can they do that? Unit-linked bonds reinvest your money in units linked to stock market investments. With-profits bonds invest in a mixture of cash, bonds, shares and property. And "combination" bonds invest in all these. With-profit bonds also earn annual bonuses, "smoothed out" to eliminate the ups and downs of stock market gyrations. Larger investments usually earn extra annual bonuses. Fixed-term bonds usually offer the potential of a terminal bonus on maturity.

Are these bonuses guaranteed? No, bonus rates have come down in line with interest rates and inflation. Insurance companies are cautious investors and don't like to be caught out.

Are there charges involved? Yes, the company salesman or independent adviser will expect to get a commission and the insurance company levies an annual management fee. But if you buy through a discount broker you can save money on the initial charge.

Can I make regular contributions? Yes, although the big growth this year has been in single premium policies bought with lump sums drawn out of savings accounts.

Can I get my money back easily and cheaply? Investment bonds are meant to be held for five years or more. If you want to cash in the bond immediately you will probably get less than you invested.

Can I get an income? Yes, certain types of bonds called distribution bonds pay a regular income. Others allow you to cash a proportion of your investments without a penalty and defer any tax on up to 5 per cent a year.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

PROMOTED VIDEO
Sport
ESPN footage showed a split-screen Murray’s partner Kim Sears and Berdych’s partner Ester Satorova 'sporting' their jewellery
tennis
Arts and Entertainment
Cold case: Aaron McCusker and Christopher Eccleston in ‘Fortitude’
tvReview: Sky Atlantic's ambitious new series Fortitude has begun with a feature-length special
Voices
Three people wearing masks depicting Ed Miliband, David Cameron and Nick Clegg
voicesPolitics is in the gutter – but there is an alternative, says Nigel Farage
Voices
The veterans Mark Hayward, Hugh Thompson and Sean Staines (back) with Grayson Perry (front left) and Evgeny Lebedev
charity appealMaverick artist Grayson Perry backs our campaign
News
i100
News
people
Sport
Chelsea manager Jose Mourinho
footballThe more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Life and Style
Vote green: Benoit Berenger at The Duke of Cambridge in London's Islington
food + drinkBanishes thoughts of soggy school dinners and turn over a new leaf
News
Joel Grey (left) poses next to a poster featuring his character in the film
peopleActor Joel Grey comes out at 82
News
i100
News
business
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Recruitment Genius: Technical Report Writer

    £25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

    MBDA UK Ltd: Indirect Procurement Category Manager

    Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

    Day In a Page

    Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

    Isis hostage crisis

    The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
    Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

    The runaway buccaneers and the ship full of gold

    Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Maverick artist Grayson Perry backs our campaign
    Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

    Assisted Dying Bill: 'I want control of my life'

    This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
    Move over, kale - cabbage is the new rising star

    Cabbage is king again

    Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
    11 best winter skin treats

    Give your moisturiser a helping hand: 11 best winter skin treats

    Get an extra boost of nourishment from one of these hard-working products
    Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

    Paul Scholes column

    The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
    Frank Warren column: No cigar, but pots of money: here come the Cubans

    Frank Warren's Ringside

    No cigar, but pots of money: here come the Cubans
    Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

    Isis stands strong as its numerous enemies fail to find a common plan to defeat it

    The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

    Virtual reality: Seeing is believing

    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
    Homeless Veterans appeal: MP says Coalition ‘not doing enough’

    Homeless Veterans appeal

    MP says Coalition ‘not doing enough’ to help
    Larry David, Steve Coogan and other comedians share stories of depression in new documentary

    Comedians share stories of depression

    The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
    Has The Archers lost the plot with it's spicy storylines?

    Has The Archers lost the plot?

    A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
    English Heritage adds 14 post-war office buildings to its protected lists

    14 office buildings added to protected lists

    Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Scientists unearthed the cranial fragments from Manot Cave in West Galilee