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WITH-PROF­ITS bonds were sold widely in the Nineties by sales­men seek­ing big com­mis­sions.

Many in­surance com­pa­nies did not high­light the fact there could be a high fee if you wanted to sell your bond — and they have failed to pay out the promised in­come. Be­tween 2000 and 2002, an as­ton­ish­ing £38bil­lion was ploughed into these bonds by savers — many of them pen­sion­ers who were promised a reg­u­lar tax-free in­come of 5pc with a min­i­mum of risk.

Some even tempted savers with in­come of as much as 10 pc in the first year.

Based on the high in­vest­ment re­turns of the Nineties, they in­creased bonuses to a level that, ul­ti­mately, they could not pay out.

They did this on the back of ris­ing stock mar­kets and some even in­creased the amount they held in shares from the usual 45pc to 55pc to as much as 75pc — mak­ing them more risky.

Then when the stock mar­ket crash came they sold out of shares into fixed in­ter­est, mak­ing big losses — which they have since failed to claw back. Poor growth and bonus cuts fol­lowed.

These in­vest­ments are no longer the same ones savers orig­i­nally signed up for.

With-prof­its was sold on the ba­sis that it can smooth out the ups-and-downs of stock mar­ket in­vest­ment — but some zom­bie funds can’t do this as they have lit­tle or no money in­vested in shares.

Last year, shares rose by 33.2 pc, as mea­sured by the FTSE All Share In­dex. But t he f unds back­ing these poli­cies man­aged just 11 pc, f i gures f rom Money Man­age­ment mag­a­zine show.

At closed fund London Life it was just 2.4 pc. This is be­cause most of these funds have stuck to fixed in­ter­est in­vest­ments and so have missed out on re­cent share rises.

London Life, Cru­sader, Life As­so­ci­a­tion of Scot­land and Na­tional Prov­i­dent have no share in­vest­ment at all.

The Pru’s £70 bil­lion fund is much more bal­anced with 37pc in shares, 12 pc in prop­erty, 40 pc in fixed in­ter­est, 11pc in cash and ‘al­ter­na­tive’ in­vest­ments. And closed funds do not at­tract star fund man­agers, who pre­fer to man­age funds where new money is com­ing in.


AN IN­SURANCE com­pany ac­tu­ary — num­ber cruncher — de­cides how much he will pay out each year to pol­i­cy­hold­ers in bonuses. These can be cut at any time.

So a pol­icy ma­tur­ing in a year’s time could have an es­ti­mated £50,000 fi­nal value, in­clud­ing bonuses.

You carry on in­vest­ing each month for the next year, but then the com­pany cuts the fi­nal bonus — so you gain noth­ing from the ex­tra money you put in. If you want to get out, you face a charge — or, in in­dus­try jar­gon, a mar­ket value ad­just­ment (MVA).

Mean­while, with-prof­its are very lu­cra­tive for the in­surance in­dus­try. On a £5 bil­lion fund, even a 1 pc an­nual man­age­ment fee gives the com­pany £50 mil­lion a year. Just how much the com­pany takes for han­dling your money is un­known.

Nic Round, di­rec­tor of fee-based ad­vis­ers Mur­ray Round, says: ‘It is im­pos­si­ble to know what they are charg­ing you and what they make on your money.’

And ex­perts ac­cuse com­pa­nies of pro­vid­ing poor ad­min­is­tra­tion for savers stuck in these funds. Pa­trick Connolly, from in­de­pen­dent ad­vis­ers AWD Chase de Vere, says: ‘Deal­ing with closed life of­fices is a night­mare.

‘They want to keep the closed funds go­ing so they can earn money from pol­i­cy­hold­ers.

‘They are not try­ing to at­tract new busi­ness, so don’t in­vest in a good sys­tem to help pol­i­cy­hold­ers.’


BONUSES could con­tinue to fall and, even if they don’t, they are un­likely to rise on these closed funds.

Guy Van­ner, man­ag­ing di­rec­tor at AKG Ac­tu­ar­ies & Con­sul­tants, says: ‘Closed funds, which have per­formed badly in the past, will con­tinue to do so. I don’t ex­pect bonuses to rise from their cur­rent lev­els.’

Pa­trick Connolly adds: ‘I can’t see an end to the trend in fall­ing bonuses in closed with-profit funds. They are ba­si­cally in­vested in fixed in­ter­est so are not go­ing to ben­e­fit from stock mar­ket gains un­less there is a sus­tained long-term rally in fixed in­ter­est mar­kets.’

Nic Round says: ‘If the stock mar­ket shot up, I think it would be un­likely they will in­crease bonuses by much.

‘But if the mar­kets fall, they are go­ing to pro­tect them­selves by charg­ing cus­tomers who come out of their poli­cies early. It is a win-win sit­u­a­tion for the fund man­agers and lose-lose for the pol­i­cy­holder.’


THERE is no blan­ket ad­vice for in­vestors in these poor funds. Much de­pends on which fund you are in and how long you have to go un­til your con­tract is up.

If you have only a few months to go, it could make sense to carry on. But there are some ba­sic checks you can make:

ARE there any in­vest­ment guar­an­tees? Some prom­ise min­i­mum rates of in­vest­ment growth of as much as 4pc a year;

DO YOU have a pen­sion guar­an­tee? Some of­fer an an­nu­ity rate well above to­day’s lev­els — though these are usu­ally just sin­gle life, which means no pen­sion would be paid to a widow;

DOES the with-prof­its bond of­fer a chance to get out free of penal­ties on spe­cific an­niver­saries — usu­ally the tenth?

YOU could con­sider mak­ing your pol­icy paid up — which means your plan stays in­vested in the fund but you do not have to pay any more premi­ums. Some poli­cies al­low you to do this with­out charg­ing a sur­ren­der fee — but it will de­pend on your in­di­vid­ual pol­icy;

IN­DE­PEN­DENT fi­nan­cial ad­vis­ers in­clud­ing Har­g­reaves Lans­down, Skip­ton Fi­nan­cial Ser­vices and AWD Chase de Vere will eval­u­ate your pol­icy for you but ex­pect to pay a fee. Al­ter­na­tively, find a fi­nan­cial ad­viser in your area at www.thi­sis­money.co.uk /ifa sy.mor­ris@dai­ly­mail.co.uk

Pic­ture: UNI­VER­SAL STU­DIOS, 2004

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