What are with-profits investments?

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Here, you can find out exactly what with-profits investments are and how they work. So you’ll have the information you need to decide whether a with-profits investment is right for you.

Please remember, there’s a risk that the value of your investment could go down rather than up, and you may not get back the amount you invested. Although the fund has no fixed term, you should be prepared to invest for at least 5 to 10 years.

You can invest in our With-Profit Fund through an investment bond, a pension plan or an annuity.

The basics

Suggested length of investment: 5-10 years or more
Level of risk: Low to medium

Investment in our With-Profit Fund offers the potential for returns that are higher than those received from a bank or building society average savings account.

There is a little more risk involved, though. Whilst you can potentially benefit from higher returns, there's a risk that the value of any investment you make could go down rather than up, and you may not get back the amount you invested. It’s also worth bearing in mind that savings accounts come with a smaller risk of losing your money than with-profits investments, any interest you earn is guaranteed, and it’s easier to access your money through them.

Most people invest in with-profits funds because they want:

  • The potential for their money to grow.
  • A regular income (as a return of capital) or withdrawals.
  • A mixture of both.

You can’t invest in our With-Profit Fund directly. Instead, you have to invest through an investment bond, a pension plan or annuity.

How your money aims to grow

With-profits is a type of investment in which the returns earned by the fund are shared out through a system of bonuses using a process called ‘smoothing’. We will first explain how bonuses work, and then describe where smoothing fits into this.

How bonuses work

If you put some money in our With-Profit Fund, your investment will grow when bonuses are added to it.

The amount of bonus – and which one(s) you receive – depends on how well the With-Profit Fund has performed and which product you’ve invested through. Bonuses can go down as well as up and are not guaranteed to be paid. However, once bonuses have been added to your investment bond, pension or annuity they cannot be taken away.

They can include:

  • A regular bonus – these are announced at least once a year, no matter which type of product you’ve invested in.
  • A final bonus – which may be paid when you make a claim, withdrawal or switch to another fund. If you invest through a pension plan, it might also be paid when you take your pension benefits.
  • An additional bonus – which may be paid on top of your regular bonus if the fund performs particularly well (only if you’ve invested in with-profits through the With-Profits Pension Annuity).

For more in-depth information about bonuses, read our useful guides or frequently asked questions.

‘Smoothing’ helps your investment grow steadily

With-profits investments are designed to grow steadily in value from year to year, rather than being subject to the significant ups and downs of the stock market. That’s because we use a process called ‘smoothing’.

We ‘smooth’ fluctuations in the value of your investment by holding back some of the returns the With-Profit Fund earns in good investment years and use them to help pay bonuses in poor investment years. Losses made in poor investment years may also reduce returns in good investment years.

The downsides

  • Because your money is invested in a mix of assets such as equities, property, corporate bonds and gilts, we can't guarantee that your investment will grow.
  • There may be times when smoothing cannot fully protect your investment and we need to apply what's known as a market value reduction (often shortened to 'MVR'). If you make a withdrawal or switch to another fund whilst an MVR is in force, the value of your investment will be reduced. Normally we won't apply an MVR if you take benefits from a pension policy on the date you originally told us you were going to retire. An MVR will not apply on a death claim.

How your money is invested

As a with-profits investor, your money is pooled with others’ and invested in a range of different assets (known as an asset mix), which make up our With-Profit Fund. By investing in a range of different assets rather than just one, we aim to achieve a more balanced return. However, this is no guarantee that the value of your investment won’t go down and you may get back less than you originally invested.

The fund will always hold a mixture of higher and lower risk assets to help achieve its objectives. Higher risks assets include equities and property; medium and lower risk investments include gilts, corporate bonds, cash and cash alternatives.

The types of asset we invest in

You can find out what the current asset mix is by reading our useful guides. We use our investment expertise to decide the best selection of assets (or asset mix) in which to invest. Not all products will have the same asset mix. They include:

  • Equities

    Equities are shares in companies listed on stock exchanges around the world. As shares can rise and fall in value very easily, equities are riskier than most other investments. However, they usually offer the greatest chance of higher returns over the long term. In our With-Profit Fund the equity part of the asset mix includes equity-type assets that are not quoted on stock exchanges, plus alternative investments such as commodities. We only invest a small proportion in alternative investments, typically less than 5%.

  • Property

    This is investment in commercial property, such as shopping centres and business offices. A valuer’s opinion often decides the value of property investments. There can be a delay in moving all or part of investments in property as it may not be possible to sell property investments immediately. It’s important to remember the values of property investments can go down as well as up and are not guaranteed.

  • Gilts

    Gilts are bonds issued by the UK government as a way for them to borrow money, usually for a fixed term. The government pays interest on the loan. As they are issued by the UK government, they are generally seen as lower risk investments than bonds issued by companies (corporate bonds).

    As gilts can be bought and sold on the open market, their value can rise and fall.

  • Corporate bonds

    Corporate bonds are issued by UK and international companies as a way for them to borrow money. The company pays interest on the loan and promises to repay the debt at a certain point in time.

    They are seen as riskier investments than gilts, which are loans to the UK government. This is because companies are more likely to fail to repay the loan than the UK government. However, they often offer a higher rate of return to balance out this higher risk. The highest risk bonds tend to offer the highest potential returns; these are known as high yield bonds.

    Interest rate movements have an impact on corporate bond and fund unit prices. So for example, as interest rates rise, bond prices fall. This would affect the value of your investment.

    If you need to access your money quickly it is possible that, in extreme market conditions, it could be hard to sell holdings in corporate bond funds. This means there could be a delay in receiving your money.

  • Cash and cash alternatives

    This includes a range of short term deposits (cash) - similar to a bank/building society account – and money market securities (cash alternatives), which are interest generating investments, issued by governments, banks and other major institutions. Cash and cash alternatives play an important role in providing a balanced return. Although cash alternatives provide a low risk return, their value can rise and fall.

The guarantees

When you invest in our With-Profit Fund, there’s a chance that the value of your investment could go down as well as up, and you may not get back the amount you invested. We may offer from time to time a number of with-profit guarantee funds with different guarantee terms.

The guarantee that may be available to you will vary depending on which product you invest in with-profits through. Conditions apply to each.

Guarantees when investing through a pension plan:

  • If you keep your money in your pension invested in the With-Profit fund until the retirement date you originally chose or your death, we guarantee to pay all the regular bonuses that have been added to your plan over the years, even if the stock market falls significantly (ie we won't apply an MVR). Please be aware that the guarantee may not apply in all cases. It does depend on your investment term. Any changes you make to your plan term could affect the guarantee. Make sure you read our pension (PDF 157KB and stakeholder pension (PDF 152KB guides for further information.

Guarantees when investing through an annuity:

  • Your annuity income will never fall below a minimum amount.
  • We won’t change your annuity income more than once a year.

To find out more, read our useful guide to annuities (PDF 146KB.

How we manage the funds

As an investor in our With-Profit Fund, you can be confident that your money will be handled with expert care and attention.

Guides to explain our principles and practices

To help you understand how we manage the With-Profit Fund in which you’re invested, we produce two guides.

There are highly technical guides called the Principles and Practices of Financial Management (PPFM) and there are simplified, more reader friendly versions. These guides can be downloaded from our With-Profits useful guides page.

Ensuring fairness through our With-Profits Committee

We're committed to treating our customers, as a group, fairly at all times. To support this, we have a With-Profits Committee which brings independent expertise and oversight, to ensure fairness is fully considered in our with-profit decision making.

Read more about the With-Profits Committee

Need more help?

For more information about with-profits or to help you to decide if with-profits is suitable for you, you should seek financial advice.

If you don't have a financial adviser you can find an adviser in your area at Unbiased. Where advice is provided, there may be an additional cost to you.

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