Cash-in and Rise like the Phoenix

Lifting its head limply amidst the ashes of burnt notes is the Phoenix With Profits Bond. Originally sold by Royal & SunAlliance, the policies have moved to Resolution and now lie with the Pearl Group.

Investors who took out a With Profits Bond in 1999 need to pay very close attention to their 10th anniversary and act.

Phoenix allow policyholders three months to take their money back on the 10th anniversary and get a gift far in excess of their fair share of the fund. So someone who invested on 30th December 1998 had until 30th March to surrender and get the full face value of their investment back. If that investment said on paper it was worth £20,000 they could pocket the full £20,000.

But if they waited until April to cash-in they would only get back an amount that the actuary considered to be their fair share of the fund and NOT the value stated on paper. In this case it would result in £15,560 being paid back.

Put another way, by taking advantage of this guarantee date, such a client would enjoy a bonus of £4,440 just for cashing-in. Amidst the cinders of this failed investment, such a policyholder walk away unharmed, rising again, revitalised like the Phoenix.

The way that Phoenix gradually reduces the MVR for policies as they approach the 10th anniversary is a good way of managing policyholders’ reasonable expectations. However an unfortunate bi-product of this is that you only know exactly what Phoenix thinks your fair share of the fund really is after the three months have passed. By then it’s too late and in the case of a December 1998 investor you’re saddled with a 22.2% shortfall.

In an industry fond of using the term loyalty bonus, this is a massive penalty for staying loyal.

And although Phoenix writes to policyholders about the date, I’ve realised with the client I met this morning they don’t copy in your Independent Financial Adviser. So unless you have an organised adviser or are willing and able to make sense of Phoenix’s two page letter you could end up making an extremely costly error.

If you invested in a Royal & SunAlliance With Profits Bond ten years ago, be sure to seize the day!

Pink Elephants and With Profits Penalties

Bill McFarlane's "Drop the Pink Elephant" is a great resource for anyone who wants to get their message across clearly. The analogy in the title of the book refers to the fact that people hear the words you say and appending a negative to a word simply plants the opposite of what you want to say in the listener or reader's mind. For example, if I asked you not to think about a Pink Elephant your mind will visualise one. It's how the brain works and to get our message across we need to take care to say what we mean and not what we don't mean.

I was reminded of this when reading a newspaper article this morning about how some savers can access their With Profits Bonds on the 10th anniversary free of any penalty. It's the use of the word "penalty" that troubles me because it implies a punishment for breaking the rules.

If you were told that for one day a year you could drive at any speed on any road without risk of a penalty, most of us would still drive like we do on the other days of the year. We know and understand why the rule is there and a penalty-free driving day would be irrelevant.

My concern is that an investor might look at a penalty-free date on their With Profits Bond and conclude that as they weren't thinking of cashing-in they weren't planning to "break the rules" anyway and let the date pass them by. If that's the case then the terminology could cost the investor thousands of pounds.

With Profits Bonds are a masterpiece in how to make a relatively straight forward concept complicated by dressing it up as something apparently simple. To understand the investment you must firstly take away all the language and jargon and look at what it actually does. You invest your money in a With Profits fund. This fund invests in company shares, property, bonds and cash, and like any other managed fund, the value goes down as well as up.

No matter what it says on your statement, the only value that really matters* is how well the fund has grown since you invested. If your £10,000 investment is now only really worth £12,000 then it matters not a jot* that it says it's worth £14,000 on paper. The insurance company will always target to give you back what your fair share fund is actually worth.

*The exception to this, using our example above, is that most will guarantee to pay the £14,000 if you die and some will allow you take the £14,000 on a specified date.

If the language was reversed and the insurance company spin stripped away and replaced with words to help the policyholder understand, savers would be left with an entirely more positive approach to this 10th anniversary. We might, for example, say that the 10th anniversary was a reward for cashing-in.

With every day that passes there are hundreds of savers missing out on a potential cash-in reward. This is a real challenge for the consumer press and the financial advice industry to really get the message across clearly, effectively and quickly. We need to drop the pink the elephants and help explain this golden opportunity.