What are the factors to choose between when considering investing in a with-profits bond? After all, they are regularly described as being a low-risk investment: is there really such a big difference between them.
The short answer is yes. Among the key issues to consider are:
n Bonus rates, be they terminal or annual, tell you how much you will receive each year for a given investment. Clearly, high rates matter. Low rates can be a product of poor stockmarket performance, or even of financial weakness which forces companies to keep a higher proportion of funds in fixed-interest securities.
But a high or a low annual bonus rate may be linked to other factors, including a fear by a serious company of low future stockmarket performance. In such cases, it may voluntarily cut rates now (with the hope of making it up with a higher terminal bonus) rather than be forced to do so in a year or two.
n Allocation rates and other charges will determine how much of your funds are invested. An initial charge is the amount of money you pay to invest in a with-profits bond. It is often described as the bid/offer spread (the bid is how much you pay, the offer is what you get if you sell) and is usually between 5 and 6 per cent.
The allocation rate is how much money is actually invested. A rate of 95 per cent means that the other 5 per cent has vanished. So a 95 per cent allocation rate coupled with a 5 per cent bid/offer spread means that 10 per cent of your cash has been taken out in charges.
Matters can get confusing: a 103 per cent allocation rate with a 5 per cent bid/offer spread, for instance, is worse than a 99 per cent allocation rate and no initial charge.
Other issues will be discussed next week.
`The Independent' has produced a free 24-page `Guide to With-Profits Bonds'. Written by Nic Cicutti, personal finance editor, the guide examines the arguments for and against investing in bonds. It explains the tax implications and where to buy a bond. For your copy of the guide, sponsored by The With-Profits Bond Shop, call 0845 2711007