What is a With Profits Bond?
A With Profits Bond is a type of investment which is seen as “low risk” investment. Technically a With Profits Bond is a type of life insurance investment however the life cover offered by such a product is negligible and they are primarily used as an investment in order to achieve a regular income.
An investor will be investing into a life insurance company. Their investment, which will be a lump sum, is known as a “sum assured” which is usually represented by a number of units. The investors “sum assured” is pooled together with other sums invested by other investors into the life insurance company and any other assets of the life insurance company including not limited to regular premiums.
This pool of money constitutes the company’s “life fund” which is used to pay out life insurance claims, however a large part of the life fund is used by the insurance company’s professional investment manager to invest in a diverse portfolio to grow the life fund.
At the end of every year the investment grows with the addition of bonuses known as “Revisionary Bonuses” which are awarded by the insurance company based on the growth of the life fund. There is no guarantee of a bonus being added but it is important to note that once a bonus is awarded it cannot be subsequently be removed.
The insurance company is under a duty to try to maintain the value of bonuses from year to year. Consequently if the life fund enjoys a very successful year then the insurance company will keep some of the profits in reserve to try to ensure a bonus in years in which the investments falls. This process is known as “smoothing”.
Whilst With Profits Bonds will have a maturity date, there is no formal tie in period and therefore an investor is free to remove some or all of their investment at any time. This means that a correctly advised With Profits Bond could provide a form of regular income to the investor. However such flexibility does bring with it some provisos:-
- They are subject to early surrender penalties which will usually be applied in the first five years.
- Any withdrawal over 5% of the initial capital amount may attract tax.
- A Market Value Adjustment (MVA) may be applied at any time which could affect the overall value of the investment.
Of the above the MVA is perhaps the more complex downside to a With Profit Bond. This is applied when there has been an ongoing fall in markets or where there has been a larger than anticipated close out rate on the With Profit Bonds which are associated with the Life fund.
The general idea of a MVA is to prevent an investor from getting more than their fair share of the life fund and to protect the life fund as a whole. They are not meant to be a permanent fixture but instead are seen as a temporary solution. An MVA will only apply when the investor seeks to close out the With Profits Bond early.
Most life insurance companies will not apply MVA is the investor is removing a small percentage of the investment with this cap usually being set at between 5% and 10% of the investment. Further it is unusual for an MVA to apply in the event of death of the investor or maturity.
How can a With Profits Bond be mis-sold?
A With Profits Bond is sold as a “low risk” investment and have the advantage of allowing for withdrawals over the life of the Bond. Advisers would also ensure that they clarified that bonuses could not be removed once granted.
However as stated, whilst the With Profits Bonds were less risky than directly investing in stocks and shares they did carry risk particular if they were closed out early. Such risks could result in the investor receiving a much lower return than they had anticipated regardless of the fact that bonuses could not be removed.
Further the bonuses where not guaranteed and were reliant on the insurance company determination of what was a fair bonus to pay with reference to the current market. The process of smoothing out also provided the insurance company with valid grounds to pay a lower than expected bonus.
In addition whilst no longer the case, due to new regulations, up until around 2010 advisers could earn big commissions, sometimes as high as 7% of the investment. Consequently the adviser had a vested interest in encouraging investors to take out a With Profits Bond so would highlight the positives whilst discounting the negatives.
Even today, despite commissions being effectively outlawed, investors can find themselves in a position in which their “low risk” investment hasn’t even protected capital.
What does this mean for me?
If you have ever been sold a With Profits Bond following guidance from an Advisor it is important that you consider what you understood at the time that the With Profits Bond was sold to you. The With Profits Bond is not suitable for every circumstance particularly if there was a risk that you would need access to a large proportion of the capital in a short period of time. It may be that another investment would have been more suitable for your needs and you should seek advice concerning whether you have a claim.
Further if you have closed or are considering closing out a With Profits Bond before maturity you may be shocked to discover that following the deduction of the MVA and/or any penalties the total due to you is less than anticipated. Again in such circumstances you should seek advice concerning whether you have a claim.
How can we help?
Here at Cooper Stern we are experts at advising individuals and businesses on potentially mis-sold complex financial products.
We offer a no-obligation initial review of a potential With Profits Bond claim, and advise on the strengths and weaknesses of making a claim. Following this, we work on a no-win no-fee basis meaning we will only take forward claims we believe have a strong chance of succeeding.
If you feel you have been mis-sold a With Profits Bond and want us to look into the matter for you please get in touch. You can fill in our simple online enquiry form and one of our expert advisors will call you back to discuss your mis-sold financial product in more detail. Alternatively, you can call us on 01204 328 287 and we will be more than happy to discuss your queries.