With-profits bonds may not be worth continuing to invest in, argues IFA firm BestInvest, as the majo...
With-profits bonds may not be worth continuing to invest in, argues IFA firm BestInvest, as the majority of surrender values are in excess of the underlying fund value and will take many years before funds are back to normal levels.
According to research conducted by BestInvest, the impact of continually falling markets, lower investment of the fund's assets in equities and the impostition of Market Value Adjusters is likely to leave funds rebuilding the reserves for 5-10 years of normal market conditions before policyholders see potential for decent returns.
In particular, BestInvest says single premium unitised WP policyholders face the greatest decisions about whether to surrender their policies, as their own research indicates 71% of the 100 cases it has reviewed over recent weeks could suffer a further loss of around 10% of the value of the assets if policies are surrendered.
Calculations suggest once early termination penalties and MVAs have been accounted for, at least seven out of ten cases will see the surrender value exceed the estimated underlying fund value by at least 10%.
Based on current conditions, its is "questionable" whether life companies can continue to operate with-profits funds on this basis, says John Turton, director of life and pensions at BestInvest.
Turton believes while there are a few companies which are financially secure enough to continue offer decent returns on with-profits policies, policyholders may have only now have a window of opportunity to exit policies because some companies have little capital to protect against further losses if the market continues to fall.
"It seems to us that, subject to any taxation issues and future dates when exit penalties do not apply (such as the 5th or 10th anniversaries or death), it will usually make sense to switch out of With-Profits [policies] if the surrender value is in excess of the 'asset share' value of the fund," says Turton.
"Even if this means taking a capital loss, investors should benefit by investing in a fund, be it protected or equity exposed to a level they are comfortable with, as they will leave with a relative profit and fully participate in any market recovery," adds Turton.
A key concern for BestInvest is the uncertain solvency levels of many life companies, after the FSA relaxed its rules on solvency for such firms, to try and limit the amount of stock-selling companies have to endure when stock markets fall, so providers are not forced to spiral the selling run further.
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