With Profits Prophets

Personal finance commentators seem to have the same problem analysing With Profits as football pundits have understanding Rafa Benitez's decisions. While football commentators struggle to understand why Rafa attacked Sir Alex, why he paid so much for Robbie Keane or why he substituted Gerrard mid-week, it seems some Independent Financial Advisers seem to equally stumble over the thoughts behind 0% bonus rates and Market Value Reductions.

There were two comments I read in the press over the past week from IFAs that left me questioning whether they had grasped some of the fundamentals of With Profits. Perhaps in providing soundbites to journalists some of the details were lost? The two comments were;


1/ A 0% bonus rate is even lower than cash

Well, yes, if you compare a With Profits bonus rate to a cash savings account then clearly 0% is lower, but the two can't be compared. That's because a With Profits policy usually has a guaranteed investment return already built in and the bonus rate is the icing on top.

For example, a With Profits endowment promises at outset to pay a Guaranteed Basic Sum plus all bonuses added at a future date. Back in the 80s when interest rates were double digit the insurance company might have set the Guaranteed Basic Sum with effectively a guaranteed rate of return of 6% per year. The extra bonuses then added on have might increased this guaranteed rate to around 9% per year. However, the performance of the With Profits fund, the shares, property, bonds and cash the fund owns, may have generated a return of only 7% per year for the time you've been saving in the fund. In order for the company to give you back a return that reflects your fair share of the growth it would be wrong to add more bonuses.

If you have a With Profits policy with a 0% bonus rate it may well be because you have some really good guarantees that you will benefit from when your saving plan ends. On the other hand, it may be that the rate is 0% because other policyholders have amazing guarantees and your low return is helping to pay these guarantees for others. You really need to check the guarantees if you have a bonus rate below 2%, and a good IFA can help you here.


2/ The current economic conditions have caused many insurers to place market value reductions (MVRs) on their funds, meaning it is not in the best interests of most clients to take action at present.

Just because there's a Market Value Reduction applying, it doesn't mean that you shouldn't ask for your money back. Even with a Market Value Reduction it could be that your savings plan is getting the benefit of smoothing that With Profits companies apply to protect savers who need their cash back after a severe market downturn. The Market Value Reduction is just the mechanism the company uses to make sure you get back your fair share of the fund rather than the conditional value that appears on your statement.

The conditions that may apply for you to get the higher conditional value usually include maturity, retirement, death, or in the case of a bond, a specified anniversary date. If you're close to being able to claim on any of those conditions then that's a good reason to hold firm. Otherwise, a Market Value Reduction is a valid reason to give your With Profits plan a health check.

For more details about checking the health of your policy, please visit www.withprofitshealthcheck.com.