With profits fund: Throwing good money after bad

Old_Slaphead

Pretty sure it used to be the WP S2 Fund.

I wasn't aware of the change until signing up for online servicing.

Fund breakdown looks too conservative for me so I'm in process of switching out but in several instalments just in case MVA is lowered in near future.

EdInvestor

mike004 wrote: »

I'm 20 yrs into a 30 year With-Profits fund with Norwich Union. Payments are 50 pound a month. This was supposed to provide me a nest egg when I was coming up to retirement. Any deposit account would have given me better returns...

Question 1: Is it worth my while to continue paying in to this fund, throwing good money after bad? Leaving the fund would cost me about 20%, it seems.

Endowments are now obsolete products.You are paying for life cover at high rates which possibly you don't need, and taxes on gains within the policy at 15-20%.The funds you are in may levy high charges.

With 10 years to go, you would likely be better to surrender the policy and reinvest in a genuinely tax free ISA,splitting the money 50/50 between cash and equities. A couple of low cost ETFs/trackers, one UK, one global would bring costs right down for the equities side.Use a discount broker for the equity ISA, shop around at the banks for the best rates on the cash side.

mike004

EdInvestor wrote: »

With 10 years to go, you would likely be better to surrender the policy and reinvest in a genuinely tax free ISA,splitting the money 50/50 between cash and equities. A couple of low cost ETFs/trackers, one UK, one global would bring costs right down for the equities side.Use a discount broker for the equity ISA, shop around at the banks for the best rates on the cash side.

Thanks. The old advice used to be to *never* cash in a policy. Now everybody seems to be jumping ship
Mike

dunstonh

The old advice used to be to *never* cash in a policy.

That wasnt advice. That came about because tied agents were usually not allowed to recommend the cancellation of existing plans. Only IFAs could do that. So, if you used an insurance agent, you were just getting the company line.

There was an element of truth in it though as these old fashioned plans had high up front charges and many, once they got past the initial charge point, went on to have little or no annual charges thereafter. So, there was little point paying all those charges initially then exiting a charge will hardly any charges to go into another only for that cycle to begin again. Also, a lot of these old plans had surrender penalties as well.

Historically, with profits did quite well. They just didnt modernise them quickly enough and solvency requirements, taxation and the move to low inflation really hit them hard. Thats why there are so few insurance companies left nowadays. That and the fact that the UK is not very profitable for insurance companies due to high competition and an overly expensive level of regulation.

Now everybody seems to be jumping ship

Not all. I have recently reviewed 5 Aviva investment bonds all invested in the CGNU with profits fund. They just came up to their 5 year anniversary. All are drawing between 5 and 7.5%p.a. net and all are in surplus from what was paid in. They are all staying put.

Personally, I wouldnt want my own money in them but there is still a place for WP although typically you are really only looking at Pru and Aviva (on the CGNU fund) as being the only viable WP funds left.

mike004

dunstonh wrote: »

Personally, I wouldnt want my own money in them but there is still a place for WP although typically you are really only looking at Pru and Aviva (on the CGNU fund) as being the only viable WP funds left.

That's astonishing. Only a couple of funds are a decent investment, the rest are basket cases.
I think mine is a Norwich Union endowment. Is there an easy way to find out what fund I am in?
Thanks,
Mike

dunstonh

That's astonishing. Only a couple of funds are a decent investment, the rest are basket cases.

Just look at how few insurance companies are left now though. Hundreds have closed their doors. Those few that are left either only transact in limited areas or dont want to know about With Profits. The With Profits fund puts an enormous drag on the insurance company.

I think mine is a Norwich Union endowment. Is there an easy way to find out what fund I am in?

The statements in the small print area or the policy schedule will normally give the full name of the with profits fund version you have (or had if it has been moved).

de1amo

i recently discussed my exiting of my standard life endowment with my usually very financialy savvy brother in law who has a simular endowmenrt and for some reason he was under the misnomer that exciting would be very difficult and he would have to wait for his cash til term end(but not adding any more payments)!-are others suffering this naivesness!!

mike004

de1amo wrote: »

i recently discussed my exiting of my standard life endowment with my usually very financialy savvy brother in law who has a simular endowmenrt and for some reason he was under the misnomer that exciting would be very difficult and he would have to wait for his cash til term end(but not adding any more payments)!-are others suffering this naivesness!!

I think the reason is that if you decide to bail out of the endowment, you will lose a hefty chunk of accumulated bonuses. You have to balance this against the likelihood of poor annual bonuses and a poor or non-existent final bonus when the policy matures should you stay in the fund.

As I mentioned earlier, a few years ago the financial sections of the newspapers all advised to *stay put* if you were in a with profits fund. Or, in extreme circumstances, get the best price by selling the policy to a company who specialise in buying endowments.
Nowadays, bailing out seems to be the recommended action in many cases...

EdInvestor

mike004 wrote: »

Nowadays, bailing out seems to be the recommended action in many cases...

A key factor at many companies following the change in regulatory/solvency arrangements in around 2003 (blame it on the collapse of Equitable Life) is the change in investment rules.

Formerly a WP fund could invest where it likes and most were 70%+ in equities.Now, the funds must reserve money to cover all those guaranteed bonuses they have allocated over the years, and this money must be invested in safe assets like cash and bonds.The returns on such assets are much lower than those on risk based assets like shares and property.Most companies now will have less than half their WP fund money in equities.

So your WP fund investment is now a significantly safer one than it was, but it will not be able to make the returns it did before.It will miss its targets, terminal and bonuses will be clawed back.

Most people are aware that their WP product is not performing but they don't understand why this change has taken place.The bottom line is that WP products were sold as both safe and top performing.When Equitable fell, the risks of this were exposed and the regulator couln't allow the insurers to fly by the seat of their pants any longer.

Now we see the result.

Old_Slaphead

EdInvestor wrote: »

A key factor at many companies following the change in regulatory/solvency arrangements in around 2003 (blame it on the collapse of Equitable Life) is the change in investment rules.

Formerly a WP fund could invest where it likes and most were 70%+ in equities.Now, the funds must reserve money to cover all those guaranteed bonuses they have allocated over the years, and this money must be invested in safe assets like cash and bonds.The returns on such assets are much lower than those on risk based assets like shares and property.Most companies now will have less than half their WP fund money in equities.

So your WP fund investment is now a significantly safer one than it was, but it will not be able to make the returns it did before.It will miss its targets, terminal and bonuses will be clawed back.

Most people are aware that their WP product is not performing but they don't understand why this change has taken place.The bottom line is that WP products were sold as both safe and top performing.When Equitable fell, the risks of this were exposed and the regulator couln't allow the insurers to fly by the seat of their pants any longer.

Now we see the result.

Thats very clear - thanks.

Makes me much more sanguine about holding on in case things pick up.

Wish the WP insurcos had explained it like that when they were changing fund investment policies.

Although they may now be less volatile, they still seem spritely enough to impliment MVAs and reduce bonuses at the first hint of stockmarket falls and are slow to put them back up.

The blokie at Clerical Medical told me that TBs were last adjusted when FTSE100 was 4800 so hopefully there's some upside coming.