Andrew Barker, the chief operating officer of Skipton Financial Services, the advisory arm of Skipton Building Society, lists the most important factors that with-profits bond investors should consider.
• Is the with-profits fund any good? With-profits bonds are a spent force in the world of investments, so you should always ask yourself is there a pressing reason why you should stay in. If there isn't, then move. More transparent investments such as unit trusts or open ended investment companies (Oeics) are much better options.
• Is the current rate of return reasonable compared with the returns achieved elsewhere?
• How financially strong is the with-profits fund?
• Is the with-profits fund closed to new investments? If it is, this often signals poor returns for those trapped in the fund.
• Are there any early exit penalties? These usually apply in the first five years of a policy, but some extend for longer.
• If a market value reduction (MVR) applyies:
(1) Is there an MVR-free point in the future when the reduction won't apply? If there is, it might be worth waiting, as the surrender value is guaranteed to increase by an amount equal to the current MVR.
(2) Are there any MVR-free allowances? Some companies allow you to take out part of the investment without applying an MVR. For example, with some Prudential policies you can take out up to £25,000 without an MVR applying. Often policies allow you to take out an income, say up to 7.5pc a year, MVR-free.
(3) What's your life expectancy? MVRs normally aren't applied on death, so if you are in poor health or very old you might be better off hanging on to the bond. Also, some policies pay out more - often an extra 1pc - on death even if an MVR isn't applying.
• Does the policy have a minimum guaranteed bonus rate? A small number of policies do, which could be valuable.
• Are you likely to require long-term care in the near future, such as moving into a nursing home? At present, the capital in a life assurance bond, such as a with-profits bond, should not be taken into account in the local authority's means testing calculation as long as the bond wasn't taken out with this in mind.
• Will surrendering result in a tax liability? Surrendering a with-profits bond can result in a higher-rate tax charge or loss of age allowance. If this is a big problem, consider splitting the encashment between two or more tax years, or waiting if your tax rate is likely to drop in the near future, for example if you're about to retire. However, a tax charge might still be worth incurring if the with-profits fund is poor – don't let the tax tail wag the investment dog.
• Are there any better funds available to switch to internally? Internal switches into better funds might be available, which would help avoid the crystallisation of a tax liability or early exit penalties.
