QUESTION: I have an investment in a With Profits Bond and have recently received some correspondence about receiving a pay out. Can you explain what this is about? ANSWER: One of the major life companies recently announced a one off cash payment to holders of investments held within some of their with profits funds.
These payments are known as reattribution offers. It is estimated that around one million people will be eligible for this distribution, with some receiving as much as £3,500. Most people will receive somewhere in the region of £1,000 each.
This money is being paid out on the basis that policyholders who opt to take up the offer will forfeit their rights to any future inherited estate payouts.
With Profits funds were designed to smooth out returns to a policyholder in the years of very positive returns some of that growth was held back, so that in the years of negative returns policy holders could receive a bonus. Over the years many of the offices have built up substantial surplus funds, but not necessarily from good investment returns, and it is these funds that policy holders are giving up the right to have any future payout from.
Most believe that such payouts are in the policy holder's best interest and will give the policies a much needed and additional boost in overall investment returns.
Returns from these types of investments have been falling over the last number of years. As mentioned earlier, the concept of a With Profits fund is to smooth out the volatility normally associated with direct stock market investments.
This is done by the payment of differing types of bonuses.
Firstly, a reversionary or annual bonus is paid each year which represents part of the growth in the fund from things like dividends, rental income and interest payments. Once added to the policy, this growth cannot be taken away.
The other bonus payment is known as a terminal bonus, which as it name suggests will be paid out on the maturity of the policy or if the policy is en cashed or transferred. Many of the life offices have not paid out any reversionary bonus for the last seven or eight years and many have been reducing their overall terminal bonuses over the same time period. As a result, investors in these types of fund have been suffering from low returns over a long period.
Similarly the prospect for dramatic improvements in the returns is also unlikely.
Many of the With Profits funds had to switch their investment philosophy to a more conservative one.
Due to impositions by the Financial Services Authority, Life Offices with a poor financial strength are forced to invest heavily in areas other than equities.
This helps predict what the ongoing returns will be, but equally will not assist in boosting the returns experienced by the fund going forward and into the longer term.
So the windfall that you may receive will be welcome news in the short term, but will not help with the long term investment returns that you may be trying to achieve. Before considering what to do, you need to seek out advice on the type of policy you hold, look at the track record of both reversionary and terminal bonuses you have received, and the strength of the life office that you hold the investment with.
You can then make some decisions as to the best way forward in light of your overall attitude to risk and the objectives that you are trying to achieve with the investment you hold.
Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority. For further information, please contact firstname.lastname@example.org or 028 9022 1010