Time to review your old With-Profits Funds? Understanding the Risks and Opportunities
By Sarah Wilson-Trainor
The UK with-profits market, a cornerstone of many long-term investment strategies, saw a significant downturn in 2022. FT Adviser reported in February 2024 that as at the end of 2022, the UK With Profits Market is worth £210 billion. Much of this is tied up in legacy With-Profits Funds in old policies that haven’t been reviewed alongside aims and objectives for many years, is it time to review your With-Profits Fund Holdings to make sure they are fit for purpose and to protect yourself?
With-profits policies have long been a popular choice for investors seeking steady returns and a degree of security. However, there’s a hidden risk that many policyholders may not fully understand: the terminal bonus. In this blog post, we’ll explore what terminal bonuses are, why they matter, and how you can protect yourself.
What Is a Terminal Bonus?
A terminal bonus, also known as a “final bonus,” is an additional amount added to the value of a with-profits policy. Unlike regular annual bonuses, which are typically predictable, terminal bonuses are subject to change based on market conditions and the performance of the underlying assets. Which means they can be removed at any time.
The Shift Toward Terminal Bonuses
Over the last decade, with-profits companies have shifted their approach, allocating returns primarily through terminal bonuses rather than annual bonuses. Why? Because terminal bonuses are more flexible. If asset values within the fund underperform, companies can reduce or withdraw terminal bonuses without affecting the core value of the policy.
Imagine a scenario where over 40% of your policy’s current value comes from a terminal bonus. While this may seem like a secure value, it’s not immune to market fluctuations. If asset values decline, that 40% could shrink significantly
Protecting Your Terminal Bonus
Given the evolving nature of with-profits policies and terminal bonuses, it’s advisable to regularly review your investment. Consider the following:
- Review your policy: Understand the current value of your policy, including any terminal bonus.
- Assess your goals: Determine if the policy still aligns with your financial objectives and risk tolerance.
- Explore options: Consider whether staying in the policy, transferring, or surrendering is most appropriate for your circumstances.
- Seek advice: Consult with a qualified financial adviser who can provide personalised recommendations based on your individual situation.
Remember, any decision regarding your with-profits policy should be made carefully, considering all aspects of your financial situation and long-term goals.
This information is for general guidance only and does not constitute financial advice. The value of investments can go down as well as up, and you may get back less than you invested. Past performance is not a reliable indicator of future results.