Both versions invest in a mix of UK equities, international equities, fixed-interest securities and commercial property through the Legal & General with-profits fund. Both provide a choice of guarantees and guaranteed return options.
The standard guarantee option provides capital security at the 10th anniversary less any withdrawals, but there are three other alternatives for which investors pay an additional charge. Option one provides a guaranteed value after 10 years of 10 per cent more than the initial investment less any withdrawals.
Option two combines five and 10-year capital guarantees, but investors must stay invested after year five to benefit from the 10-year capital guarantee. Option three combines the 10-year guaranteed return with a five-year capital guarantee.
There is no need for investors to cash in their bond to benefit from the guarantees. If they cash it in, they will get the greater of the guaranteed value or the cash in value. If they stay invested, units will be added if the cash in value is less than the guaranteed value.
The bond has no minimum term, but if it is not held for at least five years an early surrender charge will apply. Investors can make regular withdrawals up to 7.5 per cent a year, but an early surrender charge will also apply this is exceeded.
With-profits have fallen out of favour in recent years but there seems to be a revival of interest among investors. L&G says sales of its with-profits bonds rose by 96 per cent in 2009 and this could be explained by the appeal of smoothed returns when markets are volatile.
However, bonus rates can be reduced in difficult markets and investors may be trapped by early surrender charges and/or the possibility of a market value reduction being applied if they cash in the bond.
MVRs are meant to protect investors who stay invested and are usually applied when investment performance has been too weak to support bonus payments. However, they can lock people into the bond because investors leaving it could receive less than the value of the units in the bond and any declared bonuses, except on guarantee anniversaries when MVRs are not applied.