With profits bond holders feeling the pain
For many years the with profits bond market has been a godsend for investors in the UK, offering the opportunity to smooth out the ups and downs of the UK investment markets and ultimately crystallise a decent return at the end. However, while the likes of Engage Mutual and National Provident Life have already confirmed that terminal bonuses will be reduced to 0% we have today seen Phoenix join this growing band of with profits bond providers.
The whole idea of the with profits bond market is that money is put aside to allow companies to smooth out the peaks and troughs in investment markets and allow a gradual increase in bond values. Historically many with profits bond companies have paid out significant terminal bonuses for those who have retained their bonds for the full term which again comes out of money put aside in the good times.
Unfortunately for those who invested in with profits bonds 10 or 20 years ago in the hope of crystallising a significant increase and a large terminal bonus this year, the situation has changed dramatically. It is no secret that with profits fund managers have been reducing terminal and annual bonus rates for some time to the detriment of underlying investors. While it is easy to blame the insurance companies involved, the Financial Services Authority (FSA) has also played a part by insisting that insurance companies retain stronger balance sheets by increasing their reserves along the way.
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