Advisers caution against holding on to with-profit policies

WITH-PROFITS investments are unsuitable for nine out of 10 investors, according to new research, but many people are still not transferring out of the schemes.

Nearly three-quarters of 628 financial advisers polled by investment group Skandia reported that the majority of their clients were dissatisfied with their with-profits policies, while the advisers judged that the products were suitable for just 11 per cent of investors.

However, fewer than half of the advisers said their clients intended to transfer out of their policies after reviewing them.

With-profits investments include endowment policies, bonds and pension funds. They were sold to investors on the promise of “smoothed” returns – holding back some profits in good years to pay out higher annual “bonuses” in bad years. Most, though, have failed to meet expectations and sales have dropped in recent years.

Many investors are reluctant to ditch their policies because providers apply penalties for taking their money out early. However, advisers said holding on was unlikely to deliver a better outcome as bonuses were not expected to improve in future years.

“In terms of investment returns, 2009 was probably an exceptional year and, even with that, we’re not seeing pay-outs significantly increased,” said Tom McPhail of Hargreaves Lansdown. “I can’t see that there’s much potential upside from here.”

Figures this week showed that with-profits funds were continuing to underperform the stock market. Friends Provident and Standard Life paid returns to investors that were lower than last year’s rise in the FTSE – with some investors seeing the value of their plans fall over the year.

Investors whose with-profits policies are not close to maturing are being advised to think about transferring out. “Most with-profits investors could probably be doing better elsewhere,” said McPhail.

– (Copyright The Financial Times Limited 2010)