The ups and downs of the stock market in recent years have hit all investors hard. Those who opted for with-profits investments thought this was a way to iron out some of the biggest peaks and troughs. A regular, guaranteed bonus seemed like a surefire winner in tough times.
However, those who want to cash in their bonds are discovering the terrible sting in the tail that could leave them far worse off.
The bondsWith-profits bonds have been out of favour since they brought down the Equitable Life and left so many investors high and dry. However, many thousands still hold them - attracted by the notion of increased security.
The idea is that they are supposed to smooth out the roller coaster offered by the stock market. They are invested in a massive stock market fund. However, they don't match the returns from the market, they pay a bonus instead.
In a good year this will be smaller than the return from the market (because they hold some back in reserve). In a bad year the bonus will be more than they would have had in the market (because they pay out some of these reserves).
ProblemsProblems emerged when there was a shocking run of bad years, and there was nothing left to smooth with. Investors saw the value of their investments drop along with the rest of the market. Those who had chosen to take an income from their bond, found themselves eating into the sum they had originally invested.
However, that's not the end of the pain. Investors who withdraw their cash in the tough times will find themselves hit with another unexpected charge: the market value reduction, or MVR. The idea is that when the market is in a trough this fine is introduced in order to stop people withdrawing their money in vast numbers, creating a financial nightmare for the fund and crippling those who choose to stay.
Of course, the flip side of this is that you can feel trapped into staying with an investment that hasn't delivered, and you have no faith in, but you cannot afford to cash it in and pay the fine.
According to the Daily Mail, one of the current highest MVRs is Legal & General, which is charging as much as 14% of the fund for bonds set up five years ago. Meanwhile, those who bought funds from the Co-Operative in 2007 will be charged 9%. However, all MVRs are subject to change at any time.
Should you move?Patrick Connolly, Certified Financial Planner with AWD Chase de Vere, says: "With-profits returns continue on a downward spiral as we see product providers making cuts to annual bonus rates and payouts, almost regardless of how their underlying investment funds perform." There are some instances where performance is so poor and bonuses so low, that cutting and cunning may be the best bet.
However, he says it's vital to weigh up your own fund, and make a balanced decision. He explains: There are huge differences between the best and the worst providers in terms of where they can invest, the bonuses they pay and the likely future returns for policyholders."
And while abandoning the investment and taking it on the chin may be the best approach for some, he says: "While it is easy to claim that all with-profits is bad, there are often perfectly good reasons why investors should retain their existing policies. The financial strength of the product provider, their ability to invest in growth assets such as equities and their commitment to paying competitive bonuses and payouts should be important considerations. Prudential is the market leader in all these respects."
"AWD Chase de Vere has many cautious clients who are invested in Prudential's with-profits fund and a large proportion of these are perfectly happy with the performance and lack of volatility of their policies. For these investors the best advice is usually to stay put," he says.