Handcuffed to an investment anchor

With-profit bonds are like sluggish supertankers, travelling slowly across the ocean with your cash, towing anchors of unnecessary tax, poor investment options, poor investment choice and with a poor captain
Peter McGahan

THE last two weeks' reviews of with-profit funds caused plenty of further questions. No surprise really, and as always, this kicking of hornet nests, tends to highlight the greatest risk to your financial security – apathy.

I had mentioned the appalling state of zombie funds. These are funds that have closed to new business. Because of this, and the ‘guarantees' offered to previous investors, fund growth is handcuffed to the balustrades of sluggish large ships, some of which struggle with icebergs.

As they cannot afford any risk, the underlying fund has to disinvest away from the areas that provide the best returns. And so, rates of return plummet, and will indeed struggle to produce any real return after the impact of charges, tax and the extraordinary pilfering of the fund where capital goes to shareholders not policyholders – and all of that agreed in the policy particulars.

There is significant difference in the returns that funds are actually returning. Consider a study of 60 with-profit funds by Barnett Waddingham, a pension consultancy which highlights the vast differences in with-profits.

Most notable is the gap between the best and worst performers in what is nothing more than contrived opacity. The best performer ‘returned' 16.5 per cent in the year and the worst performed 2.8 per cent - less than inflation and considerably less than the market.

On close inspection, the allocation the fund has to equities appears to be driving a large part of that. You might expect a global equity exposure to be around 60-70 per cent at that time but the average of the funds was just 27 per cent. It is hard to see how a tanker running on nearly a third fuel will make the journey.

Looking closer at the actual return on equities within the fund, the variation is from 4.4 per cent to 25 per cent. How can this be possible?

The last two weeks' columns have that covered off but a further note in the research on with profit-funds showed that most of the performance came from the managers' abilities to pick the better stocks within the fund.

With billions invested in such funds, unaware investor's, pension funds and investments are languishing below inflation, which is simply unacceptable.

Whilst some with-profit funds argue that size is best because of the security, that doesn't come out in the wash as medium and small funds outperformed the weakest largest funds.

Whilst many of these funds including Legal and General have now closed to new business (zombie funds), it's interesting to look at who benefits from that? Is it the customer, the selling company or the buying company?

Well, the biggest consolidator of these funds is Phoenix. After they recently purchased Standard Life Aberdeen's book, Phoenix expected the deal to help create £3.5 billion cash between 2018 and 2022, and a further £8.3bn from 2023. Furthermore, JP Morgan estimated Phoenix's earnings per share would rocket in the following year from £8.79 to £54.49.

The poor old passenger on the lower decks! If you happen to be in a with-profit fund in an investment bond, the drag is exaggerated further as this product pays up to 20 per cent tax within the fund as it grows – a tax you cannot recover.

With-profit bonds . . . . you'll have seen the video with a piece of pizza turned into a model via Photoshop? Look it up. Marketing beats facts apparently?

These rusty sluggish supertankers have the turning speed of, well a sluggish super tanker, and in their journey across the ocean with your cash, they are towing anchors of unnecessary tax, poor investment options, poor investment choice, foolish ‘guarantees', all on a third fuel, and with a poor captain.

Meanwhile, helicopters come and go from the deck with a skim of your profits. Their lifeboats of terminal bonuses can, and are taken away at any time so even if you make it, you may disembark naked. These ships will never be repainted, so take the time to have your with-profit fund reviewed.

:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a review on your investments call Darren McKeever on 028 6863 2692, email or visit

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