With-profits policies provide smoothed growth by using reserves built up in good years to support returns in leaner years. Smoothing creates an investment lag and so the strong recovery in underlying funds in recent years has only just started to be passed on to policyholders through increased bonus rates. The table below shows this lag for the main with-profit funds.
| Company | 2002 | 2003 | 2004 | 2005 | 2006 | Bonus Recovery Started |
| Prudential | -8.1% | 16.5% | 13.4% | 20.0% | 12.4% | 2006 |
| Legal & General | -9.0% | 14.0% | 12.0% | 19.0% | 11.2% | 2006 |
| Aviva (CGNU) | -7.7% | 12.1% | 11.5% | 17.7% | 11.7% | 2007 |
| Standard Life | -12.5% | 11.4% | 10.4% | 16.1% | 10.4% | 2007 |
| Scottish Widows | -9.0% | 9.0% | 10.5% | 16.0% | 10.0% | 2007 |
| Friends Provident | -8.9% | 9.4% | 10.7% | 15.0% | 8.0% | 2007 |
| Clerical Medical | -7.9% | 9.5% | 9.9% | 13.0% | 9.8% | 2007 |
This means that now is an ideal time to invest in with-profits in order to maximise capital growth.
Traditional with-profits policies are no longer available as new investments so the only way to tap into this market is through Traded Endowment Policies (TEPs).
As most funds are now closed for new business the with-profits market is entering a long slow run off phase. This means that all existing reserves and surpluses will be shared amongst the remaining investors.
Many with-profits funds have surpluses that have been built up over many years. These ‘orphan' assets mean even more hidden value in with-profits and will increase returns over the coming years.
As the with-profits funds approach maturity all of the reserves and surpluses need to be distributed. This distribution will need to take place over at least the last ten years of the fund to ensure equitable treatment of policy holder and that the last few policyholders don't get everything.
A number of funds are approaching the stage where this tontine effect (avoiding the last policyholder getting everything) has to be managed and this should lead to a further performance boost for traditional with-profits policies.
TEPs provide high levels of capital guarantee. When you buy a policy you know the basic sum assured and total reversionary bonuses in advance. These are guaranteed to be paid out on maturity providing premiums continue to be paid. Every annual bonus declaration increases this guarantee, further protecting your investment.
When you invest in TEPs you are investing in the world's most secure, financial institutions. This peace of mind is underwritten by the Financial Services Compensation Scheme and all of the Life Offices are regulated by the Financial Services Authority.
To find out how you can capitalise on the hidden value in with-profits, call Martin Caplan on 01225 473131 or email Martin here.