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.