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With profits funds

A with profits fund is a type of investment that offers smoothed investment returns.

What are with profits funds?

With profits investment funds are offered by some insurance companies. They’re a form of managed investment that, unlike unit-linked funds, seek to smooth out the ups and downs of the investment markets.

A with profits fund usually invests in a range of different assets including equities, fixed interest, cash and commercial property. Most with profits funds are low to medium risk funds.

How do they smooth out the investment market?

The way that with profits funds seek to smooth out the ups and downs of investment markets is by declaring bonuses each year that are allocated to investors’ pots rather than participating directly in the actual performance of the underlying assets.

If the underlying assets in the fund perform well in a particular year, the bonus declared may be lower than the performance achieved by the fund – the fund holds back some of the investment growth received, to be used in years when the fund may not perform so well.

Some funds may declare these annual bonuses at the start of each year, others at the end of the year and a few in the middle of the year.

It’s also possible for bonus rates to be altered mid-year should investment conditions warrant it.


Terminal bonus

A further bonus may be payable when you draw retirement benefits from the fund, switch to another fund, or if you die. This is called a terminal bonus – the amount of this terminal bonus is not generally known until benefits are withdrawn, or switched, from the fund. But, it’s designed to broadly reflect the actual performance of the fund’s assets over the period that you invested in (having taken account of the annual bonuses that you have received).


What is market value adjustment?

If you switch out of the fund or draw benefits before your retirement date, a market value adjustment (or market value reduction) may apply, if the total amount of bonuses you have received exceeds the performance of the fund’s assets during the time that you have invested in the fund.

The effect of the market value adjustment is to reduce the amount that you receive to ensure that you are only receiving your fair share of the fund.

A market value adjustment is most likely to apply in the early years of investment, if investment markets have performed poorly. It’s not generally charged if you draw retirement benefits at your specified retirement age, or if you die before drawing benefits.


Frequently asked...

Where can I find out more?

If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.

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