With-profits schemes: more basic questions

redonion

Following on from my idiot questions about pensions in general, here are my idiot questions about with-profits schemes:

1. In the past I've heard in the news about people unexpectedly learning of the risks they were taking by opting for these schemes over others. But with-profits schemes are sold as being lower risk than other pension schemes as far as their stock market component goes. Am I right in thinking that the risk is simply that you're investing in stocks? Presumably people felt able to opt for a higher proportion of stocks than they would otherwise have done, as a result of the smoothing-out provided by with-profits schemes over pure stocks-and-bonds schemes?

2. Is there any reason I would want a with-profits investment at my age (mid 30s)? It seems unlikely that I'll get a better return from a with-profits scheme over the long term. What will I lose by attempting instead to transfer money 10 or 15 years later on in my life to a with-profits scheme if I consider that a good option at that time?

3. I had thought that with-profits funds were to be compared with plain-old shares and bonds funds, but the Standard Life website divides up funds into "with-profits" and "managed" funds. But aren't all with-profits funds managed funds (i.e. funds where a fund manager makes decisions for you, investing in multiple shares and bonds)? I guess by "managed funds" they just mean "managed funds that are not with-profits"?

4. "With-profits": why that name?? I don't see any connection between smoothing out stock market returns and that name!

Thanks all

mania112

1. Funds in a With-Profits fund are safe. That's the key feature, rather than great performance - which has died down in the last few years. You can only lose out in a few ways: if you surrender early and an exit penalty is applied to the fund, or if the company go bust (and you have protection against that anyway).

The main risks after that are inflation-related, which is probably the most likely one you'd be exposed to. As growth (known as bonus rates in this case) is potentially going to be lower than inflation. Typical bonus rates are between 0% and 3% pa.

2. With Profits are for cautious investors, perhaps at your age, that's not right for you, you may be more adventurous.

You're right, you're quite likely to find better returns elsewhere.

3. With Profits are different from investing in stocks. You're handing your money over to the life office who are investing the pot (of everyones money, not just yours) and the profits are shared. The profits are 'smoothed' so you when there's a bad year there's still some profits left to pay you a return. So the fund comes... with profits.

Traditionally, a With Profits effectively gave you a share in the company and portion of their profits. Those 'conventional' With-Profits are no longer available to new investors, and are now 'unit-linked'.

WP's - in my mind - are an old-fashioned way of investing as the ability to find decent returns are low. Only suited to the uber cautious.

dunstonh

1. In the past I've heard in the news about people unexpectedly learning of the risks they were taking by opting for these schemes over others. But with-profits schemes are sold as being lower risk than other pension schemes as far as their stock market component goes. Am I right in thinking that the risk is simply that you're investing in stocks? Presumably people felt able to opt for a higher proportion of stocks than they would otherwise have done, as a result of the smoothing-out provided by with-profits schemes over pure stocks-and-bonds schemes?

Most WP schemes are heavy in cash, gilts and fixed interest securities. Only part of it will be in equities. They are all invested for financial solvency as priority nowadays and will not go chasing the best returns.

2. Is there any reason I would want a with-profits investment at my age (mid 30s)? It seems unlikely that I'll get a better return from a with-profits scheme over the long term. What will I lose by attempting instead to transfer money 10 or 15 years later on in my life to a with-profits scheme if I consider that a good option at that time?

It is a niche fund and there are probably only two viable "new business" funds out there nowadays. It has its purposes and can fit certain types of people but it has generally had its day and I wouldnt be surprised if it is no longer available for retail in 10 years time (especially when you consider that both of the funds I consider viable are issued by insurers who are considering selling up their legacy books)

There is no reason why a 30 year would likely need a with profits fund. Although it depends on what you are looking for and your objectives.

3. I had thought that with-profits funds were to be compared with plain-old shares and bonds funds, but the Standard Life website divides up funds into "with-profits" and "managed" funds. But aren't all with-profits funds managed funds (i.e. funds where a fund manager makes decisions for you, investing in multiple shares and bonds)? I guess by "managed funds" they just mean "managed funds that are not with-profits"?

The ring fencing of assets in a with profits fund is different to that in unit linked funds. Remember that insurance companies will often dumb down their customer facing material and not necessarily use terminology that is 100% correct but correct enough. A with profits fund is managed but it can work differently to a conventional unit linked managed fund.

4. "With-profits": why that name?? I don't see any connection between smoothing out stock market returns and that name!

Historical reasons mainly. mania has covered those. The move from company profits to fund profits was over a period.

Linton

The Prudential WP fund has been pretty good, returning an average of 5.3% annually for me for the past 10 years. But I would regard it as an alternative to a long duration fixed rate deposit account rather than a 30 year growth investment.