With-profits policies – both lump-sum and regular savings – are arguably the only mass-market investment products worth having since, unlike unit-linked endowments, they offer both greater flexibility and lower charges
With bonuses for 1998 now being declared, 25-year policies maturing this year are showing average returns of 13.5 per cent tax-free – a very respectable return for a low-risk investment.
Many journalists have castigated with-profits investments as being poor value for money compared with a top-performing unit-trust regular savings scheme.
True, but the many thousands of unit trusts and unit-linked investments available makes it difficult for the individual to pick one that will outperform a good with-profits policy over the coming 10 to 25 years.
And what about the problem of unit-linked policies maturing in years like 1987?
In addition, many investors like the security of with-profits. Bonuses, once added, cannot be removed and the value of the policy can only go up. You cannot put a price on the comfort this gives anxious investors.
Part of the problem of with-profits' poor image is to do with the fact that the vast majority are sold as mortgage repayment plans rather than as a straight regular savings scheme. When inflation is running at 3.7 per cent but the cost of money is 8.7 per cent, it makes no sense to maintain debt.
Everyone should have a repayment mortgage. But if they want to save long term, a good with-profits policy is hard to beat for security and good returns.
However, it is about time the product was revamped and improved.
With-profits' major drawback is the high percentage of the out-turn which is the terminal bonus – in some cases as much as 60 per cent and on average nearly 55 per cent – and the high percentage of investors cashing in early who never benefit. Relatively few policies are held to maturity – Wesleyan has only 35 per cent of 25 year policies reaching maturity, Norwich Union 39 per cent, Scottish Widows 57 per cent and General Accident 93 per cent.
Only these four companies have been brave enough to release this information.
The PIA should insist that all companies reveal these statistics.
The persistency for short-term with-profits policies is predictably higher.
Wesleyan has 60 per cent of 10-year with-profits policies reaching maturity, Royal London 67 per cent, Scottish Amicable 76 per cent, Norwich Union 78 per cent, Scottish Widows 79 per cent, General Accident 82 per cent and Equitable Life 88 per cent.
Clearly, a large proportion of with-profits investors get a poor deal because they lose out on the terminal bonus.
The actuaries have always argued that rewards should go to those who save for the full term.
But in today's uncertain labour market, and with a shorter working life, it is not realistic to expect individuals to commit themselves to saving for 25 years, and penalise those who are forced by circumstances – divorce, ill health, unemployment or early retirement – to discontinue their policy.
Given that with-profits bonds have no fixed term and frequently pay a terminal bonus after five years, it must be possible to offer a 25-year with-profits policy, which can be cashed in at any time after 10 years – but still qualifies for a terminal bonus.
As now, the terminal bonus could be adjusted to reflect the number of years the policy has been held, past and future investment returns, and the number of investors cashing in.
This would clearly affect the terminal bonuses for long-term holders but even 10-year policies were showing average annual yields of 9.4 per cent in 1997 compared with 25-year yields of 12.8 per cent.
Greater flexibility would make with-profits attractive to many more investors.
It would also dispel the nasty suspicion that bonuses have little to do with good investment performance and everything to do with ripping off the very high proportion of early leavers.