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With Profit Funds are very popular for pension and life insurance based savings.
In essence you , the policy holder, share in the profits accrued by the company, but life is now much more complex. You actually get what are called bonuses, and these build up over time in order to eventually produce your fund.
With Profits was always only ever applied to Regular Premium investments as time is needed for the structure to work. However in recent years With Profit Bonds have been created which offer access to the With Profit market for Single Premiums. These behave a little differently, but first of all make sure that you understand how the Regular Premium basis works.
Each month you pay a premium that the company invests in the markets. At the end of the year you will be told that you have accrued a Bonus of X, say 4%, and let us say this is £200. This is a Reversionary Bonus, ( God knows why).
In a phrase that you will frequently see in almost all literature, "Once Added Cannot Be Taken Away".
A number of facts:-
It means that the company will give you £200 when the policy matures, in maybe 5,10,25 years time.
Technically what happens is that the company has arranged to have investments that will produce the £200 when needed, normally Government Bonds because they are very safe.
When the policy reaches the end of its term a Terminal Bonus will be added, and this will normally be as much, or more, than the Reversionary Bonuses accrued to date.
The combined total is your payment.
And let me introduce the Reserve - companies do not apportion all of the money to bonuses, they can also take money from reserves in bad years, or add to the reserves in good.
With Profit companies like to say that with With Profits you don't have to worry about markets falling just before the end of the contract. Cynics note that since at no point do you actually know the real value of the fund you will never know if you were so affected, or, if the fund had done well, that monies had not been put into reserve for other people.
A marketing cynic might note that if you were a small company 25 years ago and now have maturing policies you can be very generous with those maturing policies ( to appear high in the 25 year tables). Or perhaps 14 years ago was a very bad year for you and very few were sold. This year you might hold money back, accepting a lower ranking, in order to really go high next year.
Over time With Profit Funds and Managed Funds actually produce similar results, and the short term market changes mean that one year the With Profit companies will shout that the stats show that they do best, in other years the Unit Linked companies will be crowing.
It is probably fair to say that the only reason that we have With Profit Funds is historical, ( in the old days everything was done in this way). If we did not have them there would be no need to invent them as standard investments plus protective derivatives would suffice. Which brings me to :-
I do not like these products. They are very easy to buy in error, and it is my feeling that most people do not understand them.
They were created back in early 1991, and the idea is that you invest a single premium and benefit from the bonuses. However the raison d'tre of With Profits is that the company allocates resources according to known future liabilities. Because this is not known , and the system cannot cope well with uncertainty, all of these products that I am aware of have what they call a Market Value Adjuster.
In short, whatever bonus they may have declared, they can back down and pay the real value of the funds. This means that the normal protection from market fluctuations is missing, ( especially over short terms), and, IMO this is not clear to most investors.