Steer clear of with-profits, says Which? Money

19 November 2008

An estimated 25 million people* have a with-profits** policy worth £400 billion, but people with new money to invest should avoid these funds as they are complex and confusing, says a new report from Which? Money.

Millions of people have with-profits policies for their pension, savings or mortgage endowment. But two thirds of Which? members (66%) with these policies surveyed*** by Which? Money said they would not consider investing in a with-profits policy in the future and 44% said they were dissatisfied with their investment.

As well as policies performing badly, people are being trapped by high exit and transfer penalties and their policies have been hit by providers cutting their bonus rates. The lack of transparency means people don’t know what bonuses they’ll receive, and can be unsure whether an exit penalty will apply when they cash their policy in. There is no guarantee that the provider will run the fund in the best interests of policy holders.

Big names such as Legal & General, Prudential, Norwich Union and Scottish Widows all recently reintroduced or increased penalties for people ending their policies early, while Norwich Union reduced its final bonus rates by as much as 10%.

One Which? member commented that he receives more interest on his current account than on his with-profits policy, “and that’s after tax”.

Which? Money offers the following advice to consumers with with-profits policies:

1. Check your documents to make sure whether the policy is with-profits – an annual statement with a ‘bonus rate’ means that it is.
2. Consider if you need your policy, and if so, whether you can replace it with an alternative option.
3. Check whether you will suffer from any penalties if you stop the policy, and if there are any penalty-free days.
4. Look for any guarantees you could lose and consider whether you should sacrifice part of your terminal bonus by leaving.
5. Check whether there is any payout due from the fund’s ‘inherited estate’.
6. Get advice from an IFA – find one at www.unbiased.co.uk.

Martyn Hocking, Editor, Which? Money, says:

“There are lots of reasons to be wary of with-profits policies: they are too complex and confusing to be a good investment and the firm retains too much discretion over whether to pay bonuses and impose exit penalties. Some companies still sell these policies, but if your financial adviser recommends that you invest your money into one of these funds, alarm bells should ring!

“For those people with some new money to invest there are plenty of alternatives to with-profits policies. Consider a Best Buy**** savings account or Isa, or for those prepared to take on some risk, you can invest in the stock market. If you are worried about an existing with-profits investment, seek advice from a recommended IFA.”

- Ends –

Notes to Editor

Which? is the leading independent consumer champion in the UK, providing impartial, expert information on thousands of products and services to help make individuals as powerful as the organisations they have to deal with in their daily lives. To find out more go to www.which.co.uk.

The full article ‘Escaping the with-profits trap’ appears in the December 2008 issue of Which? Money magazine. For further information, the full article, a copy of the magazine or an interview, please contact Helen Lacey.

Gift subscriptions to Which? Money magazine can now be purchased from Borders, priced at £24.97 for 12 issues.

For more information on with-profits policies visit www.which.co.uk/withprofits

Research Notes

* As estimated by the Association of Mutual Insurers in Money Management, August 2008.

** With-profits funds are invested in a mixture of shares, property, gilts and cash. Ideally, people are then credited with annual bonuses that are ‘smoothed’ by holding back some of the return in good years so they can be paid more than they have earned in the bad years – thereby, smoothing out the volatility of the stock market. With-profits funds also offer a final bonus when the policy comes to an end.

** * Between March and June 2008, 23,474 Which? members were surveyed online about a variety of topics including ownership of with-profits policies.

**** To be a Which? Money Best Buy savings account, the provider must subscribe to the Banking Code, which sets minimum standards for the way banks, building societies and other banking providers treat their customers. It must also be fully covered by the Financial Services Compensation Scheme (FSCS) so that if the worst happened and the bank went under, customers would get their money back up to the current £50,000 limit. We exclude any short-term interest rate bonuses that banks and building societies add onto their savings rates to make them appear more attractive. Our Best Buys are widely available across the UK and can be purchased as standalone products. All our Best Buys can be found at www.which.co.uk/money