LONDON (Reuters) - Returns on with-profits bonds are on the up, a study shows. The average surrender value of a 25,000 pound bond over two, three, four and five years are all higher than they were a year ago, according to the latest survey by Investment, Life & Pensions Moneyfacts.
It shows that although many with-profits bondholders have jumped ship in recent years, those who maintained their investments are realising the benefits.
Someone who invested 25,000 pounds in an average with-profits bond in February 2002 and surrendered the policy three years later would have received just 25,655 pounds.
But, by keeping the bond for a further two years, it would now be worth 30,999 pounds — an increase of 20 percent.
Payouts over three and four years show average growth of 21.3 percent and 35.5 percent respectively, while five-year returns are slightly worse at 23.9 percent, reflecting the more difficult investment environment during this period.
During the mid-1990s, with-profits policies — which aim to “smooth” returns by holding back some returns in years of strong investment performance to pay out in the bad — were the main avenue for investors looking for a long-term, secure investment.
Billions of pounds flooded into the sector, which was seen as relatively low-risk, had guaranteed annual bonuses and the potential for final bonuses.
However, fund performance tumbled as the bear market of 2000/03 took its toll and forced fund managers to cut bonuses.
But Richard Eagling, editor of Investment, Life & Pensions Moneyfacts, said the picture had much improved.
“Even though the stock market has enjoyed a remarkable recovery since the dark days of 2000/03, ‘smoothing’ has ensured that investment gains have trickled rather than flowed through to with-profits investors,” he said.
“But after years of waiting patiently, those individuals who kept faith with their with-profits bonds through the turbulent investment conditions at the start of the decade are finally reaping the rewards.
“Payouts are starting to rise, terminal bonuses are back on the menu, whilst menacing market value reductions have all but disappeared.
“And for some of the more fortunate investors, even annual bonuses are beginning to climb.”