With Profits fund - final bonus

daveybuk

I'm trying to help my elderly Mum sort out a couple of investments. I'm pretty well-versed in shopping around for good savings rates (from the days when they existed!) but she has a Prudential With Profits bond that I don't understand so well. It currently has a cash-in value of just over £14,000 with a Final Bonus of about £7000. She draws down £3600 per year. This year, that reduced her fund by £3540 so in around 4-5 years, what remains of her capital will have been used up. When the money in that pot runs out, is that considered 'maturity' and a Final Bonus is paid? Or is that considered the end of it and she has effectively 'lost out' on the £7000 she could have taken at this point? With returns so low currently, it feels intuitively that it might be better to cash out now and reinvest in a normal savings account (admittedly at pitiful interest rates but without management charges) knowing that the final bonus will equate to an extra couple of years to draw down on. Any thoughts welcome! 

Joe9090

I have a similar plan. You might want to read this https://www.pru.co.uk/existing-customers/bonus-declaration/with-profits-faqs/#:~:text=as final bonus.-,Final bonus,guaranteed and it can change. and ask additional questions after you have read it.
One thing to bear in mind is if you wanted to cash in the bond now it will could take a couple months after your request. People with more experience than me will tell you not to cash in if you don't need the money as generally you would get a better return with the bond than saving with a building society.   

daveybuk

Joe9090 said:

I have a similar plan. You might want to read this https://www.pru.co.uk/existing-customers/bonus-declaration/with-profits-faqs/#:~:text=as final bonus.-,Final bonus,guaranteed and it can change. and ask additional questions after you have read it.
One thing to bear in mind is if you wanted to cash in the bond now it will could take a couple months after your request. People with more experience than me will tell you not to cash in if you don't need the money as generally you would get a better return with the bond than saving with a building society.   

Thanks. I had already had a look at that but couldn't fathom whether a final bonus is still paid if what is effectively the capital in the fund has reached zero through regular withdrawals. Regarding savings accounts, I've taken the approach in the past that she should just leave it there. However, if it's only 'making' £60 a year to offset withdrawals and cashing out would provide the equivalent of 2 extra years' capital, you can see why it's tempting... 

dunstonh

When the money in that pot runs out, is that considered 'maturity' and a Final Bonus is paid?

The final bonus accrues as you go along and it part of the value.   It doesn't mature.  It would require a surrender when it gets down to a low value.

With returns so low currently, it feels intuitively that it might be better to cash out now and reinvest in a normal savings account (admittedly at pitiful interest rates but without management charges) knowing that the final bonus will equate to an extra couple of years to draw down on. 

Surely that is making it worse.  The old Pru WP funds can be little gems (unlike the more modern version).   Pretty consistent on their returns with some element of capital protection and low cost (again, unlike the modern versions).    Taking it out of a plan that is likely returning around 5-6% a year on average to put it in a bank paying under 1% doesn't seem sensible.

daveybuk

dunstonh said:

When the money in that pot runs out, is that considered 'maturity' and a Final Bonus is paid?

The final bonus accrues as you go along and it part of the value.   It doesn't mature.  It would require a surrender when it gets down to a low value.

With returns so low currently, it feels intuitively that it might be better to cash out now and reinvest in a normal savings account (admittedly at pitiful interest rates but without management charges) knowing that the final bonus will equate to an extra couple of years to draw down on. 

Surely that is making it worse.  The old Pru WP funds can be little gems (unlike the more modern version).   Pretty consistent on their returns with some element of capital protection and low cost (again, unlike the modern versions).    Taking it out of a plan that is likely returning around 5-6% a year on average to put it in a bank paying under 1% doesn't seem sensible.

But last year it appears to have returned £60, on a £17000 investment. You're right, of course, if there's any likelihood of that type of return by the time they've taken their fees. Thanks for the info on the final bonus. It sounds then like she should cash in at some point closer to the capital running out and mustn't let it get to zero. 

dunstonh

But last year it appears to have returned £60, on a £17000 investment. 

But you said it's £21k, not £17k. - look a the total. not just one bit of it.      And you always get years with low returns and years with higher returns.   The £17k is the capital protected bit.  The final bonus is the bit that moves around in value.

Most modern investments walk all over legacy investments from yesteryear.   However, the Pru investment bonds from the late 90s through to the mid 2000s are little gems.    I have people on these that have gone through the dot.com period, credit crunch and CV and drawn their money every year and it has seen them through retirement nicely.   They are not fashionable or flash. They just do the job intended and do it rather well.    They are probably the only investment from that era that we don't move to modern alternatives.