Glossary: With-profits bond
Lump-sum investments that usually have no set term or fixed maturity date. The consumer’s money is invested in the provider’s “with-profits” fund and the value of the initial investment accumulates through the addition of bonuses, which are decided by the provider’s actuaries. Bonuses are usually added every year – based indirectly on what the with-profits fund has earned – and once added, they cannot generally be removed. These bonds are generally considered to represent a lower risk because with-profits funds usually include a mix of assets. Some bonds are subject to early surrender penalties, which usually apply during the first five years and some life companies penalise investors for making withdrawals from products invested in their with-profits fund, which is called a market value adjustment (MVA).
With-profits funds are administered by life assurance companies and access to them is through the life company’s products such as bonds, endowments and pensions. Your monthly contributions are pooled with other investors’ money and invested in a mixture of shares, bonds, property and cash. Each year, a “reversionary” bonus (a declared percentage) is added to your investment and a large part of the policy’s final value depends on these bonuses during the investment period. In years when the with-profits fund performs well, some of the return is held back and paid out in years when the fund does badly and this “smoothing” process makes with-profits investments unique. When the policy matures, the life company may pay a discretionary “terminal bonus”.