It was not that long ago since With-Profit Bonds dominated the investment advice arena. In fact, between 2000 and 2002, £8.3billion was invested, via IFAs, into with-profits bonds (Source ABI). While there were offshore with-profits bonds available, they did not attract new business to anything like the level of their onshore equivalents.
Recent investigation of the with-profit bond book here at AEGON Scottish Equitable revealed that around a third of policyholders are taking withdrawals from their bonds. If this trend extends across the whole industry, then many clients are depending on this ‘income’. In many instances, that ‘income’ level will have been set at around 5% per year. In the past, this may have been a sensible level as bonus rates were above that level. But what about today?
Few, if any, of the with-profits bonds are paying out a rate of over 5%. This means the client is taking withdrawals which are not being matched with capital growth. If this continues the fund may be exhausted and so the ’income’ would cease. Given they are living longer, for example a 60-year-old man has a 50% chance of living to 88 and a 60-year old woman has a 50% chance of reaching 91, there is a risk this could happen.
This, then, gives an opportunity to review their current with-profits bond product and suggest alternatives. And there are tools out there that help you to do this. Recently, AEGON Scottish Equitable launched such a tool, using information from Cazalet Consulting. It confirms details (including current bonus rates) for all With-Profits Bonds and gives each one a Cazalet rating. Having reviewed a product using this tool, it may be reducing the level of withdrawals is a sensible option. But what if income is crucial to your client?
As an adviser, you will have many other approaches and products that can help to meet your clients’ need for income. And that is where an offshore opportunity comes to the fore. For those clients who are looking for guaranteed income, there is a non-pensions offshore plan, which guarantees to pay income, no matter how markets perform or how long the client lives. The product is AEGON Scottish Equitable International’s 5 for Life.
This article might be a bit AEGON-centric but I truly believe the issue of capital growth (or lack of it – in the case of many with-profits bonds) versus ever healthier end customers who are taking ‘income’ from their bonds is a real issue. It is one that proves there is a need for constant and high quality financial advice with the right solution.
Steve Whalley is head of marketing at Aegon Scottish Equitable
The views expressed in this blog are those of the individual and not necessarily the company he represents.IFAonline
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