With-profits bonds – a decade of poor performance Which? research uncovers dismal returns

26 September 2011

with profits investors lose out

With-profits bond investors have endured a miserable decade of returns

With-profits bond investors have suffered a decade of miserable performance, with two bonds returning under 1% per year, according to new research from Which?.

On average, with-profits bonds have paid just 2.7% a year – worse than the average cash Isa of the last 10 years – yet, despite these poor returns, the bonds continue to be sold to consumers, with £1.7bn invested by 50,000 people in 2010.

With-profits fails to beat cash

The NPI with-profits bond has paid out just 0.17% a year between 1 March 2001 and 2011, turning a £10,000 investment into £10,176. Meanwhile, the Scottish Widows with-profits bond has paid out just 0.78% a year in the last decade.

Throwing the poor performance into stark relief, the average cash Isa has paid out 4.6% a year over the same period, while the FTSE 100, the stock market index that measures the performance of the 100 largest companies in the UK, has paid out 3.56% annually.

The five worst performing with-profits bonds
Bond10 year return (a)Annual growth rate
Scottish Mutual£12,2382.04%
Pearl Assurance£11,7321.61%
Royal Life£11,5191.42%
Scottish Widows£10,8120.78%
FTSE 100£14,1843.56%
Average Cash Isa£15,6784.60%

Table notes

  1. Based on a £10,000 initial investment
  2. All figures accurate to 1 March 2011

The with-profits problem

With-profits bonds are investment products that put your money, along with other investors, into a with-profits fund, which invests in a mixture of shares, bonds, property and other assets. These funds use the concept of smoothing – holding returns back in the good years to pay a return in poor years – to grow your money.

While the concept might make sense, Which? believes that many with-profits funds have been poorly managed over the years. We think that some insurers managing the funds haven't been running them in your best interests, for instance using them to pay the tax bills of shareholders and create new products, often making a loss in doing so.

Finally, many with-profits investors have been frustrated to see the value of their investments dramatically fall through market value adjustments (MVAs) when they want to exit their bonds. Our research found that some bonds can levy reductions of up to 35% on exit. In many cases, this can't be helped by the insurer but highlights one of the major problems in with-profits funds.

Which? campaign for with-profits policyholders

Which? believes that with-profits funds have been one of the biggest sources of consumer detriment in the financial services industry and insurance companies have been abusing with-profits funds, and their policyholders, for their own gain.

Which? is working to ensure that policyholder interests are better protected and will carry on meeting with the regulator and Government officials to press the case for change.

More on this…

  • Learn more about our with-profits campaign
  • Read our ten steps to assessing your with-profits policy
  • Not ready to invest? Check our best rate savings and best rate cash Isa tables