The outlook for with-profits funds is unlikely to improve in 2010, despite expectations of strong stock market performance, warns IFA Fraser Heath.
The firm, which runs a web-based with-profits service for policyholders (www.withprofitshealthcheck.com), says it is vital advisers know when policies should be surrendered and how the various guarantees work.
Its with-profits specialist, Miles Hendy, says in recent years the effects of the credit crunch and the recession resulted in cuts to with-profits bonuses, and the use of market value reductions (MVR) by providers.
However, while the stock market rapidly improved through the summer of 2009, Hendy believes with-profits funds will fail to live up the expectations of many policyholders.
"In the past with-profits delivered good returns with a degree of stability for investors, but today they are a very different beast," says Hendy.
Increasing market volatility and declining new business means many with-profits funds are seriously underperforming compared to other vehicles, he says.
He cites the most recently published with-profits figures from Aviva which reveal its main fund made a 6% after tax return in 2009, compared to nearly 10% for the Aviva Cautious Managed NU Life fund. Hendy believes this situation is similar for many with-profits funds.
"With-profits funds face the problem that their structure, and the need to manage the guarantees, means they often sell when markets are falling and buy when they are rising," he explains.
Hendy says it is vital advisers understand the way with-profits funds work, and in particular any guarantees on the fund.
"In many cases you can improve tax efficiency and the rate of return buy choosing another investment vehicle, but advisers have to make sure they understand the full implications of any guarantees the policy may offer.
"Some policies carry incredibly valuable guarantees which simply are not available elsewhere, such as generous guaranteed annuity rates," Hendy adds.
"It would be foolish to surrender a policy with such a guarantee, but other offers are less valuable. Advisers need to make sure they know what each guarantee offers so they can compare the with-profits investment to other vehicles."
Paul Bruns and Elaine Parkes
3,000 left to transfer
Record numbers of people aged 90 plus
From 3 to 10 October