With profit Investment Bonds

A With Profits Bond, like other bonds, is made up of a variety of investment types. A typical With Profits fund would have approximately 75% equity and property and 25% lower risk investments such as cash, and gilts/fixed interest. The main difference is in the unique way that it provides investment growth.

A With Profits fund is designed to smooth-out the peaks and troughs of equity investments by way of providing yearly bonuses with the potential of a Terminal Bonus. This means that in contrast to other investment types where the investment value differs day by day dependant upon the values of the components within it so that the investment value goes up and down, a With Profits Bond will rise each year by the set amount of the yearly bonus declared. This means a With Profits Fund's growth is extremely steady and, if the fund performs well, you are rewarded by the addition of a Terminal Bonus - a bonus that is added to the fund when it is encashed, matures or at set anniversaries.

The yearly bonus, once added, is guaranteed i.e. it cannot be taken away so your original investment value should always grow. Like all investments we must point out there are no guarantees and all investments carry risk, but this is a lower risk than equity investments. Many companies will apply early termination penalties which means that in the first few years, if you cash-in the fund there may be a charge in the form of a penalty. This is usually on a decreasing basis and the providers will generally reserve the right to apply a Market Value Adjustment (MVA), which means that in extreme market conditions (or if large amount are withdrawn) they may apply the penalty. Some companies will not apply an MVA on withdrawals up to a certain level i.e. income withdrawals, or after 5th or 10th anniversaries.

It is the Terminal Bonus that can go down as well as up, and it is this that the providers use as a kind of pressure valve to add extra to the fund when growth is good or to hold back growth in leaner times. This is the icing on the cake, and in some cases a terminal bonus can exceed 20% over five years, i.e a fund of £100,000 would receive an extra £20,000 as Terminal Bonus. Please note that past performance is no guarantee of future performance.

The following graph was produced for us by one of the UK's largest With Profits Fund providers. It shows the typical performance of With Profits funds compared to the FTSE 100 (Financial Times Stock Exchange top 100 shares [equities]), and the Retail Prices Index. Here it can quite plainly be seen that With Profits produced steady growth as opposed to the fluctuations of equity investments, with Norwich Union's own fund outperforming the average With Profits Fund.

There are many providers of With Profit Funds and some companies have more than one fund i.e. some designed to provide income as opposed to growth, and here at Lewkay Financial Services we can analyse all the companies to find a suitable fund for you.

If you wish to know more about With Profit Bonds, or have any questions regarding them, please contact us via the questions section of our secure enquiry form. IT COSTS NOTHING TO ASK AND THERE IS NO OBLIGATION.

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