With-Profits values CAN go DOWN
There is a well-worn investment risk warning which states that the value of your investments can go down as well as up and you may get back less than you invest.
This is the equivalent of the health warning on a packet of cigarettes, reminding investors that their money could lose value.
The reality is that most investments will go down in value from time to time. It’s the inevitability of investing. Few investments ever rise in a ‘straight line’.
It seems though that some investors may believe that their with profits policies, whether these are held within Bonds, Pensions, Endowments or some other insurance savings contract, cannot fall in value.
This is incorrect and reflects a common misunderstanding of the nature of with profits and, in particular, the modern way they are managed.
It is beyond the scope of this article to examine the intricacies of every possible variation and type of with profits plan. However, on a general basis they are likely to fall in value if asset prices are falling.
Recent major falls in asset prices threaten values. Investors who have money in with-profits need to be aware of this.
Many will have current values with part of the overall value being attributed to a ‘terminal bonus’ entitlement. This amount can be subject to fluctuation and reduction if the underlying asset values are falling.
Many policies may have a further trigger that could be applied to reduce values further if necessary.
Known as a market value reducer (MVR), the majority of policies will have this built into them. This means the manager of the with profits fund will be able, at a moment’s notice and without warning, to apply a penalty to reduce the value even further.
Funds can also, in some cases, suspend withdrawals, transfers or surrenders.
Some or all of these mechanisms will be familiar to a number of with profits investors – especially to the hundreds of thousands who suffered when their Equitable Life policies ran into serious troubles in the past.
But there will be many millions of investors who do not know about these threats and who may perceive that with profits is safer than other types of investment or even that their plan/fund is totally safe or secure.
With Profits Reviews
We review, on a case by case basis, individual with profits policies every day for investors who want clarity about their positions. What do we see more often than not? Poor past returns, limited future prospects and policies where the risks are higher than the investor realises.
The risk/reward position on a typical with-profits policy is way off the optimal position.
What this means in Plain English is that the investment has limited potential reward given the risk being taken.
Time and time again we review policies for investors where the risk is higher than it should be given the potential return (the reward). This is not true of every policy we see, but is a general trend.
Our concern is for the millions of people who may have taken out a with profits policy in the past, sold on the basis of low risk (or no risk?), they are now holding an investment that could be far riskier than thought. They could be subject to falls or reductions – swiftly and without warning.
If you have a with profits investment then our report service will be able to identify what risks are involved on your individual policy and how this compares to the potential reward. You can obtain a bespoke review based on your policy. This way you can judge for yourself where you stand and the prospects going forward.