The catch with profits

MONEY TALK

FINANCIAL companies like to waffle on about the brave new world of simplicity in their products and services. But for a less rose-tinted view you don't have to look far.

One estimate has it that there are 14 million "with-profits" policies in force, either as the endowment policy part of endowment mortgages or in the form of savings plans, bonds or even personal pensions. With- profits policies are still one of the most widely held investments around; they are also one of the most complicated. And last week was the start of their annual bonus announcements.

What is unusual about with-profits is the way that the investment returns accrue - the bonus bit. Your money goes into a fund that invests in the stock market, but the value of your policy does not rise and fall with the underlying investments. Instead it grows steadily: the company managing your money awards yearly bonuses and then, when the policy matures, gives a further top-up bonus.

This year's bonuses are set to face particular scrutiny because of the glorious year for stock-market investment that 1997 was. Investors might expect significantly higher bonuses. If only it were that straightforward.

Last week saw announcements from Norwich Union, Friends Provident, General Accident (GA) and Scottish Provident. The good news is that for people with policies maturing in the coming year, payouts are generally higher. Even so, these increases on last year are typically only of the order of a few per cent. The less good news is that for people with ongoing policies, levels of annual bonus have in many cases been reduced from what may have seemed modest levels in the first place. These policies have still increased in value, but not by as much as might have been hoped.

The companies all have an armoury of explanations and it can be fiendishly difficult to assess whether policyholders are getting a good deal.

That said, for anyone with a maturing policy, my advice is don't get too hung up on how much your company's payout has changed from last year. What isimportant is thereturn you have got on your money. Average annual returns on some policies, particularly those that have been going for up to 25 years, are 13 per cent or more, which is pretty good, particularly with inflation averaging just 6 per cent or so over the same period. Similarly for people with ongoing policies, while it is true that a cut in bonuses is hardly welcome, it is the return when a policy is cashed in that is important.

Annual bonuses, once awarded, are guaranteed and companies say they are having more problems making these guarantees. By cutting bonuses now, policyholders have more chance of getting a better return at maturity, they say. Let's hope so.

What is certain is that inas-much as such cuts mean a higher proportion of the payout is dependent on the top-up bonus at maturity, they do make with-profits policies a more risky pro- position. They mean that if you have to cash in your policy before maturity you could stand to get poorer value. If you do have to cash in, such bonus moves may well make it even more worthwhile selling your policy in the "secondhand" market (contact 0171-739 3949), where prices tend to take more account of the expected maturity value.

q With-profits policies are not the only brow-furrower among investments. The IoS's new free Guide to Making Your Investments Work for You aims to help savers make appropriate choices. For a copy, phone 0800 137 9749, or return the coupon on page 12. The guide is sponsored by Wesleyan, a mutual financial services company.