31 January 2010

With Profits Policies - time to reconsider?

With profits policies were appropriate for many investors when they came along 10 - 12 years ago. They include a mix of asset types (shares, fixed interest, etc.) and are managed by the insurance company to "smooth" the ups and downs of investing.

The trouble is they have become synonymous for many people with an opaque investment which does the opposite of what you expect. It is up to the insurance company actuaries to decide on the annual bonus rate - the amount by which your investment increases - or the Market Value Reduction (MVR) - the amount by which it decreases (in effect). The way that the smoothing is done can mean that values are now going in the opposite direction to the stockmarket, since they take into account the average performance over a longer period of time.

Combining this with a more cautious approach to asset allocation than when a policy was bought (to protect the bonus pool) means that for many people it is time to get out. Having an MVR doesn't necessarily mean that it is the wrong time to sell, but it is worth checking if there is a time when your policy waives the MVR - this can happen on the 5th or 10th anniversaries, for example.

Having said that, there are still worthwhile With Profits policies out there.

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