Mr Jones invests £7,500 in a with-profits bond. Five years later, in 2003, it has a face value of £10,000 but an encashment value of only £7,500 – due to a 25 per cent MVR currently prevailing.
This he can live with, for a while at least, as he was warned at the outset of MVRs. When the MVR is lifted, the encashment value of his investment should return to its face value.
Mr Jones is contemplating investing a further £7,500. He believes this could be an opportune time to do so, with the price of units so low.
As the stockmarket recovers, he could see his new investment increase in value by 33 per cent in a relatively short space of time as the available encashment of his existing investment recovers to £10,000.
He decides to consult his insurance company to make sure his thinking is on track.
“Oh no,” he is told. “Irrespective of the encashment price of what you have invested with us over the past five years, any new investment would be applied to secure units at the face value price of your existing investment.”
What if he had to encash his new investment within only a short time of making it? “If market conditions were the same as they are now, then the current 25 per cent MVR provision would apply.”
“But this is outrageous,” wails Mr Jones. “What loss would your with-profits fund suffer if market conditions remain unchanged between the time I made this new investment and subsequently needed to encash it?
“This is a heads you win, tails I lose situation. Why should I have to pay more to buy new units now than the encashment value you would allow me on the units I have had invested with you for the past five years?” This suggests that with-profits bonuses are secure only for as long as the stockmarket goes up but not down and that the much-vaunted security of with-profits, for single-premium investments at least, is little more than a myth.
On this point, I am beginning to see what Ron Sandler is driving at.
WDS Independent Advisers, Bristol