Feb/11 - Concerned about your with profits investment?
It is likely that at some point in your savings life you will have come across with profits. Many endowment policies that were used to support mortgages were invested in with profits funds.
There are also many individuals who are exposed to with profits funds through their pension plans. Investors of lump sums were also encouraged to put their money into with profits bonds. In fact it is estimated that up to 20 million savers are investing in with-profits in one way or another.
These funds operate by allowing cautious investors access to the stock market without too much risk by pooling their investments together.
Your contributions are paid into a fund with those of other "with-profits" investors. The fund is then invested and each year you should receive a bonus that is usually a proportion of the profit made by the fund. Some of the profit is held back to smooth out the periods where no profits have been made so that you can still receive a bonus.
There is also a potential final or terminal bonus paid if you keep your plan running till the end of the term.
This all sounds fine and seems like a suitable investment for a cautious investor.
However it has become more common in recent years to apply penalties if you try to surrender your plan before the end of the term.
These penalties are known as market value adjustments MVA’s).
The argument used to justify the application of an MVA is that it protects the remaining policyholders during turbulent investment market conditions by preventing anyone who leaves during these turbulent periods from receiving more than their fair share of the fund.
The application of these penalties has caused major concerns in the last few years as stock markets have gone through a volatile period. The penalties are not always explained very well. In addition clients are not always aware of dates that may be part of the policy conditions when they can access their funds without suffering a penalty.
With-profits policies have also been attacked because of their lack of transparency. Information to policyholders was hard to find, the performance of the fund relative to the bonus added did not always make sense to investors.
Also, risks were not always explained to investors when they signed up for the policies. Unrealistic projections of final funds were given and this resulted in many mis-selling cases being referred to the Financial Ombudsman Service.
The Financial Services Authority (FSA) has now launched a consultation on strengthening the rules on with-profits to better protect policyholders.
This will help to protect existing policyholders and will also ensure that potential new investors are better informed before they make the decision to invest.
This is still a complex type of investment and Simple Solutions feel that you should seek independent advice if you currently have a with profits plan.
We can find out, on your behalf, if you have any penalty free dates available where you would be able to surrender your plan without a penalty.
We are aware of the penalties that are currently being applied and we are also aware of the Providers where no penalty is being imposed.
This information will help you to make an informed decision regarding your with profits investment.
There are also potential tax implications if you surrender certain with profits plans and we can advise you if you are likely to be affected by this further “penalty.”
If you would like to arrange a meeting with one of our Advisers to discuss how we can help you please contact us.