Guide to With Profits Bonds

Guide to With Profits Bonds t r u s t e d c l e a r i n f o r m e d

Guide to With Profits Bonds Introducing With Profits Bonds Back in the 1990s, With Profits Bonds were a hugely popular way of investing for the future. As a single premium life assurance policy, the appeal lay in its aim of delivering steady growth, cushioned from the fluctuations normally associated with investing in the stock market. Ultimately, rather than proving to be a rewarding investment, the performance of some With Profits Bonds have disappointed and many With Profits Bond holders have understandably been left wondering what to do with them. Not all With Profits Bonds have performed badly. However, if you are disappointed by the level of returns your bond has delivered, there are a number of options available to you. This guide from Skipton Financial Services (SFS) aims to help you assess whether your With Profits Bond has delivered the return that you had expected, before outlining the potential options available. It can be difficult to accurately analyse whether it is financially better to encash or keep hold of your investments. However, Laterlife has teamed up with SFS to help you to weigh up the various advantages and disadvantages through SFS s With Profits Bond Review Service so you can make an informed decision. Who are SFS? Established in 1988, SFS is one of the country s leading financial advisory companies with over 100,000 clients throughout the UK. SFS is a wholly owned subsidiary of Skipton Building Society, and they share the same mutual ethos of putting their clients interests at the heart of what they do. Their quality of service and expertise has also been independently recognised, as SFS is one of the UK s largest advisory companies to be awarded Chartered Financial Planner status by the Chartered Insurance Institute (CII). SFS is also especially proud to be listed in the Sunday Times Top 100 Best Companies to work for in 2011. 2

A brief history of With Profits Bonds The concept of With Profits investments has been around for many years. These insurance policies were originally introduced by mutual insurance companies, as a way for their members to share in the profits generated by the company. These open ended life assurance policies were designed to provide steady returns from investment markets, without the fluctuations often suffered by other forms of stock market-linked investments. How they work A proportion of the profits made by the fund in one year would be put to one side and used to enhance the returns paid to investors in leaner years. This is done in an attempt to provide returns which do not fluctuate as significantly from year to year and is called the smoothing effect. The returns would usually take the form of regular annual bonuses called Reversionary Bonuses. In some cases, on maturity or encashment, a Terminal Bonus would also be paid. The potential size of this Terminal Bonus was an attractive feature, which further encouraged investors. 3

For more information call 0800 145 6661 What went wrong? Over the 1990s these investments, in the main, provided more than satisfactory levels of returns increasing their popularity. However, when the dot com bubble burst around the turn of the millennium, the markets started to experience significant volatility. the smoothing effect which had largely worked well in the past could not cope with the unprecedented drop in equity markets and With Profits Bonds providers began to slash bonus rates and cease paying terminal bonuses, as well as introducing market Value reductions (mvrs). An MVR is an adjustment mechanism used to prevent those who encash their bonds from taking more than their share of the With Profits Fund. fluctuating performance of stock market Reserve Good times Reserve in times of adverse conditions the product provider may impose a market Value reduction on investors making full or partial withdrawals. terminal Bonus (if applicable) smoothing effect of With Profits fund Bad times currently, due to past poor stock market performance, reserves are low and market Value reductions are being applied across many With Profits Bonds. Market recoveries Some companies had also given certain investors guarantees, which at the time were economical to provide; but as market conditions worsened, they became increasingly expensive. These guarantees effectively create liabilities to the fund which companies are requested to cover by less volatile assets; forcing a switch out of equities. However, this caused many funds to miss out on the subsequent growth from a resurgent stock market, exacerbating the issues further. In fact, in extreme cases, problems surrounding With Profits Funds have caused weaker insurance companies to close their doors to new business altogether. 4

Guide to With Profits Bonds How they stand now In recent years, With Profits Bonds have endured a significant amount of negative press. However, not all investments have been the complete disasters they are broadly painted as being by the financial media. The difference in performance from one bond provider to another can be distinct, as the tables below demonstrate across a number of With Profits Bonds. While it is a useful way to compare your Bond s performance with others, past performance is not necessarily a guide to future returns. Based on encashment values of 10,000 investment over 5 years, as at 1 November 2010* Best With Profits Bond 13,240 5.8% Annual Growth Rate Average With Profits Bond 11,792 3.4% Annual Growth Rate Worst With Profits Bond 10,428 0.8% Annual Growth Rate Based on encashment values of 10,000 investment over 10 years, as at 1 November 2010* Best With Profits Bond 15,019 4.2% Annual Growth Rate Average With Profits Bond 12,596 2.3% Annual Growth Rate Worst With Profits Bond 9,914-0.1% Annual Growth Rate * Source: Money Management, January 2011. Stronger With Profits Bond funds which were able to see out periods of stock market uncertainty have performed significantly better than others. In contrast, many other companies which moved investments out of equity markets and into less volatile assets, when equities fell sharply, were not as well-positioned to benefit from the subsequent recovery in the markets. 5

Guide to With Profits Bonds so which companies have underperformed? if your With Profits Bond is provided by one of the companies below, SFS strongly recommend you contact them to have it reviewed as it is particularly likely to have underperformed. scottish mutual scottish Widows standard life friends Provident axa npi Pearl scottish equitable sun life royal & sun alliance clerical medical Regardless of how well your Bond has performed, there are a number of other important factors to consider and it is still worthwhile holding a review to determine its true value. 6

For more information call 0800 145 6661 With Profits Bonds review areas to consider While past performance is a useful guide to how well your bond performed compared to others, it s more important to find out what you can expect from your investment in the future. There are a number of factors to consider when assessing the prospects of your bond, which are outlined below. Bonus Rates Many investors were originally attracted to With Profits Bonds by the high level of bonuses they were paying at the time of the investment. traditionally With Profits Bonds have paid two types of bonuses: reversionary bonuses at an annual rate terminal bonuses, an extra bonus on encashment or death. Currently, due to market conditions, terminal bonus payments are very rare and in general, reversionary bonus rates have dropped some to as low as nil. This has been particularly difficult for those investors who require this bonus for income. an investor should consider whether these basic returns are still sufficient to satisfy requirements, whether for income or growth, to allow the value of the bond to stay ahead of inflation. Some With Profits Bonds pay a guaranteed minimum bonus rate. This is obviously an attractive feature; however the payment of this guaranteed bonus may have an effect on other features, such as the rate of reduction of any MVR that is applicable. MVR (Market Value Reduction) If an investor decides to encash a With Profits Bond it is possible that an MVR could be applied to the investment which would reduce the proceeds (as mentioned earlier). An MVR is not a penalty but should be viewed as a reflection of the true value of the underlying investment in the With Profits Fund. The size and potential term of the MVR must be taken into account when considering encashment. For example, even if an MVR seems large, the potential returns from an alternative investment may outweigh the potential of the MVR on encashment. 7

For more information call 0800 145 6661 Guaranteed MVR-Free Dates If a With Profits Bond would incur an MVR on encashment, it is possible that at some point in the future, such as the 10th anniversary an MVR is guaranteed not to apply on encashment on that date. If the MVR is large and the time to the particular anniversary short, this could be a very valuable feature. However, the opposite is also true in that, if the MVR is smaller and the term to the encashment point a significant period of time away, this guarantee may be deemed an insufficient reason to retain the bond. Bonds which have an MVR and future MVR-free date are effectively provided with a valuable minimum guaranteed growth rate if the bond is encashed at the future MVR free point. Investors should assess that guaranteed growth rate to help them decide whether to retain their bond. No MVR Guarantee on Death If a With Profits Bond holder s life expectancy is short either due to health or age, then, dependent upon circumstances (including the size of MVR), it may be better to retain the investment; as an MVR is not applied to most bonds on death. MVR-Free Amount Many providers allow withdrawals of a certain percentage of the original investment MVR-free every year, which is typically 7.5% (and the tax can potentially be deferred). If an MVR is being applied, consideration should be given to exploiting this MVR-free access. Term Since Investment Many With Profits Bonds have withdrawal penalties which apply on encashment within the first 5 years of an investment. If a bond is less than 5 years old, this charge must be taken into account prior to any encashment being made. Financial Strength The financial strength of a With Profits Bond provider is extremely important. The stronger the company the better; they are able to better support their With Profits Fund and allow investment into a more diverse range of long-term investments. However, all With Profits Bond providers financial strength have been affected by recent stock market performance and some have been left in a better position than others. The table opposite provided by AKG, an independent actuary, shows financial strength of a number of With Profits funds 5 being the strongest and 1 being the weakest. 8

Guide to With Profits Bonds AKG With Profits Fund Ratings Summary Group Company Funds Financial Strength Open UK Life Office With Profits Report Resolution AXA Sun Life plc traditional With 3 Profits Fund Standard Life Standard Life With Profits Fund 4 Legal & General Legal & General Assurance With Profits 5 society Ltd sub-fund Aviva aviva Life & Pensions Old With Profits 5 uk Ltd sub-fund Prudential Prudential Assurance With Profits 5 company Ltd sub-fund Closed UK Life Office With Profits Report Equitable Life The Equitable Life sterling With 1 assurance Ltd Profits Fund Resolution Friends Provident closed Fund 3 life Assurance Ltd Phoenix Group Phoenix Life Phoenix With 2 & Pensions Ltd Profits Fund AXA Winterthur Life UK Ltd With Profits Fund 2 Source: AKG With Profits Report, November 2010. Although not the only factor, the financial strength of the parent company plays a major part in determining the financial strength, and future performance, of its With Profits fund, and this factor must always be borne in mind when considering the future of this type of product. 9

Guide to With Profits Bonds Other factors to consider Before you make a decision on whether to cash in your With Profits Bond or keep it, it is also important to evaluate your own personal circumstances. So far we have helped you get an idea of how your investment could be performing and the intricacy of this type of investment, but your own personal situation can have a significant impact on whether you retain your investment or not. Your health One of the most important factors to consider surrounding your investments is your own health. A lot of people tend to forget that these investments have life assurance benefits attached. On death most With Profits Bonds will pay either 101% of the fund value or 101% of the surrender value whichever is higher. At this point, in general, no MVR or exit charge is imposed. This has a significant bearing on elderly investors in poor health, as this is a valuable guarantee. If they were to move their money to another investment and die shortly afterwards, they may have a reduced lump sum to pass onto their family. Your wealth You should also consider your financial situation. You should not look at your With Profits Bond in isolation, but consider these as part of your overall investment portfolio. Is this With Profits Bond a smaller part of a larger portfolio? If so, you may reach a different decision of what to do with it compared to someone who has the majority of their investments tied up in this type of investment. 10

For more information call 0800 145 6661 Your risk profile It is also crucial to consider your risk profile. With Profits Bonds were typically sold as low to medium risk investments and, therefore, were bought by people who were fairly risk averse. For most people this meant that they wanted to invest in a product that offered the potential for reasonable growth, but with a lower level of risk. If you decide to cash in and move this type of investment, you should have a clear idea of where you want to re-invest this money, what the potential returns may be and the risk involved compared to what you are currently receiving from your With Profits Bond. Generally, as people get older they tend to be more cautious. But this comes at a cost, because with any financial investment there is a balance between risk and reward. Higher potential returns mean higher risks and there is a chance that your investment may fall in value, plus you could lose some of your original investment capital. Alternatively, low risk investments generally offer lower returns. After retirement, people tend to have limited opportunity to replace any lost savings; so careful consideration needs to take place if you are thinking of encashing your With Profits Bond. What to do next As this guide has highlighted, there are many things to consider when reviewing your With Profits Bond. Every investment should be considered independently, along with your own personal circumstances and long-term financial goals. With so many complex issues to consider, this has led to many investors being unsure as to what to do next. It can all seem very complicated and you could get immersed in small print when trying to sort these investments out yourself. However, SFS s no-obligation With Profits Bond Review Service will do this for you. They will identify any issues you should consider on your investment as well as take you through the advantages and disadvantages of keeping your bond, and determining what your next steps (if any) should be. 11

How to get in touch simply call sfs s dedicated team on 0800 145 6661 and they will arrange an appointment for you to meet with one of sfs s advisers. alternatively, complete the form at the back of this guide with all the requested details and return to the following address, and sfs will contact you: Laterlife, Skipton Financial Services Ltd, With Profits Bonds Review Service, FREEPOST NEA4129, Skipton, North Yorkshire BD23 2BF (no stamp required) Any alternative investments SFS recommends may include equity-linked products. These are not like bank and building society accounts as their value can rise and fall and your capital is at risk. SFS charges a fee for the products they arrange for you. Any SFS charges, initial and/or ongoing, will be disclosed to you in writing before you make a final decision. The tax treatment of investments depends on your individual circumstances and may be subject to change in the future. 12

With Profits Bonds Please complete all your details below and overleaf, place in an envelope (no stamp required) and return to: Laterlife, Skipton Financial Services Ltd, With Profits Bonds Review Service, FREEPOST NEA4129, Skipton, North Yorkshire BD23 2BF Please fill in the information below: Name: Address: Postcode: Telephone Number: Email Address: * Mobile: * * Only provide your email address or your mobile number if you would like to be contacted by either of these media. Date of Birth: With Profits Bond 1 Name of Provider when Bond taken out: (Note: Name of insurer may have changed since your Bond was taken out) Investment Date: Amount Invested: Income Taken: Yes No

With Profits Bond 2 Name of Provider when Bond taken out: (Note: Name of insurer may have changed since your Bond was taken out) Investment Date: Amount Invested: Income Taken: Yes No With Profits Bond 3 Name of Provider when Bond taken out: (Note: Name of insurer may have changed since your Bond was taken out) Investment Date: Amount Invested: Income Taken: Yes No Skipton Financial Services Limited may use the information on this form to provide you with details of our own selected products and services by post or by telephone. If you do not want to receive these, please tick here. Skipton Financial Services Limited would like to pass your details on to other carefully selected organisations in order that we can offer you information, goods and services that may be of interest to you. If you would prefer that your details are not passed to such organisations please tick this box. You are entitled to request details of the information we hold about you, we may make a small charge for this service. Simply write to the Data Controller at Skipton Financial Services Limited, The Bailey, PO Box 101, Skipton BD23 1XT. Registered in England No. 2061788. Skipton Financial Services Limited is authorised and regulated by the Financial Services Authority under registration number 100013. Skipton Financial Services Limited is a wholly owned subsidiary of Skipton Building Society.

15 Guide to With Profits Bonds

Skipton Financial Services Head Office in Skipton. Financial Advice is provided by: Skipton Financial Services Limited, The Bailey, PO Box 101, Skipton, North Yorkshire BD23 1XT Tel: 0800 085 0459 Web: www.skiptonfs.co.uk t r u s t e d We are experienced and trusted financial advisers so we only recommend the solutions that are right for you c l e a r Everything is clearly explained in plain English and we are always open and honest in our approach i n f o r m e d Our advice teams are experts and carry out continuous research to give you the most informed financial choices Registered Office: The Bailey, Harrogate Road, Skipton, North Yorkshire BD23 1DN. Registered in England, Number 2061788. Authorised and regulated by the Financial Services Authority under registration number 100013. Skipton Financial Services Limited is a wholly owned subsidiary of Skipton Building Society. LLWPB/08/11