Scottish Widows has introduced the flexible options bond, a with-profits bond that provides investors with access to two new with-profits funds.
The with-profits growth fund has a current bonus rate of 4 per cent and the with-profits income fund has a bonus rate of 4.75 per cent. Scottish Widows chose to offer two funds because it wanted to offer a different asset mix to cater for the needs of investors. The with-profits growth fund has a larger weighting of equities than the with-profits income fund, which has a higher weighing in corporate bonds and property.
Investors can choose one of the funds or they can invest in a combination of both, but it is up to the investors whether they take income or not from either fund.
The with-profits funds were created to keep the main attractions of with-profits funds, while addressing some of the criticisms with-profits have had recently. Scottish Widows took on board the views the Association of British Insurers and the Financial Services Authority have on with-profits in terms of issues such as clearer charges and more openness about how the funds are performing.
An interesting feature about the flexible options bond is the use of a guarantee account, whereby a small amount is set aside and invested in hedge funds that can make money in all conditions. By doing this, Scottish Widows plans to guarantee bonus rates, rather than reducing them during times of poor stockmarket performance as some with-profits providers have done recently.
However, the use of hedge funds may not sit comfortably with the emphasis on more openness in with-profits because of the closed nature of the hedge fund industry and the difficulties in explaining the concept to the average investor.