With Profits Funds Explained

What is a With Profits Fund?

A with profits fund is invested to a cautious strategy. It contains a diverse mix of assets in order to mitigate risk and reduce volatility, but its value doesn’t fluctuate like a classic daily traded fund. Instead, a with profits investment holding is subject to regular and terminal ‘bonuses’, which is how the overall value grows.

With Profits Fund Bonuses

Bonuses are awarded annually to with profits investors. At the point a bonus is due, the fund managers would look retrospectively at the year’s performance and award an appropriate ‘bonus’. When someone exits a with profits fund, or their investment matures, like an endowment, a ‘terminal’ or ‘final’ bonus may be awarded.

As with-profits bonuses are intended to be awarded and not taken away, they are often conservative, and not a true reflection of overall performance. Instead, investment performance growth is held back for a ‘terminal’ or ‘final’ bonus. In the case of a pension fund, a terminal bonus may be awarded when a member transfers pension funds out, switches investment fund or begins retirement benefits.

Market Value Reductions – With Profits Funds

While bonuses are not meant to be taken away, a with profits fund can apply an ‘MVR’ – a Market Value Reduction. An MVR is a penalty applied to funds in poor market conditions.

With Profits funds were very popular in the 80’s and 90’s as the bonus rates were positive. However, the over generosity of bonuses at that time has caused issues with poor market results in recent years. Many with-profits funds have awarded little or nothing in terms of a regular bonus, and only by withdrawing/transferring money can an investor benefit from the final bonus (which can be taken away at any time). This is due to market uncertainty, and the environment in managing a very cautious fund.

What to do if you hold with profits funds in your pension plan

Those holding with-profits funds should consider a portfolio review. Modern with-profits funds such as those run by Prudential and Standard Life are managed sensibly, with modest yet consistent returns. However, there is a huge amount of pension money still remaining in old-style costly pension plans; invested into outdated with-profits funds awarding little or no returns.

A pension switch – moving from one private plan to another, or investment switch – changing funds within a pension plan, is a simple process. Reducing costs and promoting long-term growth is the key to sensible planning and long-term financial security.

Use our research toolkit to find out if you hold with profits funds in your pension plan.

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