Back in the Nineties, With Profits bonds were as popular as Ford Sierras. But while Ford had the grace to retire the Sierra before it fell, insurers seem determined to run With Profits into the ground..
The personal finance columns must be pretty tricky for the journalists, because there really is not much around that is new. Most of us want to put something away to spend later, we'd like it to keep pace with inflation, and if we can do a bit better than that we are generally quite satisfied. Those of us who have passed the age of 40 know that we all spend the first half of our lives worrying about dying young, and the second half worrying in case we live too long.
Anyway, With Profit Bonds have been back in the headlines. A few years ago, a lot of us were sold these beauties. The sellers used to say that they were as safe as Building Society deposits, but with the chance of capital gain. All this was founded on the apparently stellar returns on many 25 endowments that matured in the late 1980s and early 1990s.
Needless to say, With Profit Bonds have delivered poor returns over the past ten years, when the stock market has gone nowhere. So the general wisdom to check the policy to see if you can get out at a five or ten year anniversary without penalty makes eminent sense.
But believe it or not, the With Profit Bond can still be found. It is actually a single premium life assurance policy, with a sum assured of £1 more than the premium. Don’t ask me why it is like it is, because we’d be here all day.
Your money goes into a 'fund' although the way the fund actually works differs quite a lot from one office to another. The actuaries who run the fund can change the asset allocation without telling you. So your bond might start with 75% in equities but wind up with 30% in no time at all. You are stuck with the fund managers, even if their performance turns out to be ghastly. The charges are very far from clear. You will benefit from an annual bonus declaration, but the only certain way to do so is to die. When you want your money back you may find that the provider applies a Market Value Reduction to the nominal value of your Bond. You will pay your share of the income and capital gains tax paid by the fund.
That is, by the way, a trick financial planning question: how can you make certain that your client will be liable for capital gains tax? The answer is to sell him or her an investment bond.
On the face of it, given that Equitable Life did for With Profits what John Prescott did for ministerial dignity, it may be a surprise that you can still actually buy what amounts to a pig in an actuarial poke. Why have these things not simply disappeared? After all, there are simpler and more transparent ways to allocate assets, and retain control of the costs and direction of the individual investments.
There are three reasons. One: we consumers are gullible, we like being reassured, and ‘With Profits’ is a quite wonderful name. Would you like it with profits, or without, sir? Two: sales people can earn twice the commission payable on a portfolio of Unit Trusts. Three: Life companies are surrounded. There is nothing they can do that no-one else can do, except of course With Profits. And there are no charges that they can obfuscate, except of course for With Profits. Which is why a few people have made a lot of money hovering up old With Profits funds.
Once upon a time financial services was a three player game in which the product makers and the product sellers ganged up on the product buyers. Regulation was supposed to change all that. It hasn’t. The very existence of the With Profit Bond proves the point. If it were a horse...
Read this article at http://www.candidmoney.com/articles/article59.aspx
No comments:
Post a Comment