The catch with profits
Sunday 11 January 1998
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.
25 July 2014 11:00 PM
A London estate agent yesterday put a price on having a garden. David Pollock of Greene & Co reckons it can increase a property's value by a tenth.
Problem gambling: Amid heavy advertising and a surge in remote sports betting, more and more 16 to 24-year-olds are now seen as 'at risk'
26 July 2014 12:00 AM
25 July 2014 11:00 PM
Payday loan firms have been accused of bombarding financially vulnerable people with nuisance phone calls, after a debt charity reported that a third of its clients were plagued by the messages.
24 July 2014 12:00 AM
A plan to defuse a “mortgage debt timebomb” when interest rates rise is published today amid warnings that 2.3m households could struggle with their repayments.
Current accounts are too costly and confusing, says CMA as it announces investigation into Britain's biggest banks
19 July 2014 12:00 AM
19 July 2014 12:00 AM
11 July 2014 12:20 AM
11 July 2014 12:20 AM
How would you like to be able to choose how your electricity is made and even where it come from? It may sound futuristic and fanciful but the independent supplier Co-operative Energy has made it a reality this week.
11 July 2014 12:20 AM
04 July 2014 03:49 PM
MPs want medical evidence for claims. Will this bring higher premiums?
04 July 2014 11:00 PM
British Gas was yesterday forced to pay back £1m to its customers after mis-selling them energy deals.
- 1 Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
- 2 Christians: The world's most persecuted people
- 3 The secret report that helps Israel hide facts
- 4 Danish TV reporter is all business up top, all party down below
- 5 Ross Burden dead: MasterChef and Ready Steady Cook star dies at age 45
The secret report that helps Israel hide facts
A day in the life of Vladimir Putin: The dictator in his labyrinth
Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
Were 'Poor Doors' added to mixed developments so wealthy residents don't have to go in alongside social housing tenants?
A new Russian revolution: The cracks are starting to appear in Putin’s Kremlin power bloc
Arizona execution lasts two hours as killer Joseph Wood left 'snorting and gasping' for air
iJobs Money & Business
£45000 per annum + Benefits: Ashdown Group: ** HR Business Partner - Senior H...
£28000 - £32000 per annum + Benefits: Ashdown Group: PA / Team Secretary - Mat...
£30000 - £34000 Per Annum 25 days holiday, Private healthcare: Clearwater Peop...
£400 - £450 per day: Orgtel: Business Analyst - Credit Risk - Banking - London...
Day In a Page
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000