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With-profits AVCs beat unit-linked

With-profits AVCs have outperformed unit-linked contracts, with the average fund producing returns of 6 per cent a year over the past three years, according to Watson Wyatt.

Over three, five and 10-year investment periods, all but one with-profits AVC provider produced a higher return than the best-performing managed unit-linked contract.

Wyatt found the equivalent unit-linked managed fund AVC lost 5.7 per cent over each of the past three years.

Over five years, the average with-profits AVC returned 8.1 per cent a year while a unit-linked contract was down by 0.4 per cent. Over 10 years, the return on a with-profits fund is 9.5 per cent compared with a 5.6 per cent return on a unit-linked fund.

Equitable Life was the major provider of AVCs until its financial difficulties.

Watson says Clerical Medical, Friends Provident, Norwich Union, Prudential and Standard Life have picked up the majority of new business in this area, taking up policies moved out of Equitable.

Watson says Equitable chose not to respond to its survey due to “pressures of work”.

Senior consultant Andy Parker says: “The smoothing of returns to investors over a number of years has clearly favoured those in with-profits.

“Many providers are now applying an adjustment to movements out of the with-profits fund before retirement and bonus levels overall have fallen significantly over the past few years, with greater emphasis being placed on final or terminal bonuses.”

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