SO WHAT WENT WRONG?
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.
WHY ARE THEY BAD NEWS FOR INVESTORS?
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.’
AND THE OUTLOOK IS BLEAK…
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.’
SO WHAT CAN YOU DO?
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 email@example.com