Do you have any views on the inflation-proofing with profit bond being offered by Norwich Union as I have been advised to come out of my property fund and go into this plan?
‘Frying pan …fire..’ With profits reminds me of one of those horrible movies when the monster, despite having been blasted by every laser and explosive available, keeps crawling back. Eventually the audience turn the TV off.
The ill-fated concept of with profits was thought initially to be a good idea. Everyone was sold on an umbrella that would provide a smoothing of returns in the event of a difficult market. So in each year the investment house would invest your money, produce returns, and then decide how much of your money they would give you and in turn decide how much they would keep behind – pretty much how you treat your children on holiday with their spending money.
On the first occasion we needed to open the umbrella, we found holes all over it. And so all the smoothing they promised disappeared. With the holes came an MVR (market value reduction). This was basically a lock that stopped people exiting the investment as they would be thumped with a large penalty. This was also coupled with the fact that the with profit bond was producing bonuses that were less than cash.
One thing investors should have learned from that is to ensure they have an exit strategy and not to tie themselves up in a plan that had as many exits as a round room.
Moreover the key is also to avoid packaged products. In assessing hundreds of products, I have yet to approve one, as they are generally opaque in their nature and appeal to a one stop approach for the investor. Advice for every investor should be unique and as the word says, advice.
This offering by Norwich Union provides investors with a guarantee of a full return of their investment with inflation proofing after five years. I’ll analyse that guarantee in a moment, but firstly consider if you might need access to the cash within the first five years. Whatever you take from the bond, either by way of income withdrawals or just an encashment will reduce the guarantee proportionally at the end of five years.
Consider also that if the adviser who is selling you this plan is taking commissions this will also be taken back from you on encashment, so seek the surrender details for the first five years. A common ploy is to offer an increased allocation on entry but few people fall for this now, as most are wise to the fact that it is simply an enticement which is taken away if charges are not recouped earlier by encashment… what’s the point?
If death occurs during the first five years, the bond will pay out 100.1% of the value of the plan at the time, not the guaranteed value, so there are no guarantees in the first five years.
After five years you will have access to the cash of either the bond value, or the value of the guarantee, whichever is the greater. In truth, what is the value of the guarantee, and here is the crux of the matter.
Inflation appears to be under control at 2.7% and the recent hikes in interest rates will drag inflation down further. So what of the prospect for inflation below 2.5% on average over the next five years? What of the prospect of deflation? The Bank Of England have a target inflation of between 1 – 3%. On that basis your guarantee from this bond is 1-3% per year. Whoopee, that’s less than the building society!
Investor’s focus should be solely on the potential for extra returns from the actual fund and we all know what they have been for the last few years when the stock market has soared only for you to be left behind with the shackles of an MVR.
This new plan also has the opportunity to apply an MVR, mmmm!
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