Of course, the finished question is “Do you cut and run, or stay and pray?”, prompting With Profits investors to consider whether they should stay invested in a fund which has produced poor returns in recent years (“stay and pray”) or accept the fund might be likely never to improve and transfer away (“cut and run”).

Unfortunately, there is only a handful of with profits funds which have retained the financial strength and an investment strategy which has generally served their investors at least relatively well over the last fifty years or more.

The financial strength of many With Profits funds have suffered badly over the last couple of decades.

Why?

Traditional With Profits funds declare, each year, a bonus (known as a ‘reversionary bonus’) which cannot be taken away once it has been added to the value of the policy. Insurance companies have historically determined the annual amount of these bonuses at a level which they believe can be continued many years into the future.

Unfortunately, a couple of decades ago an increasing number of insurance companies started to escalate the bonus rates to much higher levels and many introduced certain guarantees which they have since regretted. Many funds have now been forced to adopt such a conservative investment strategy in order to maintain financial solvency that it appears highly unlikely the fund will ever again be able to provide competitive rates of investment return in future years. 

Some with profits funds have declared ‘nil’ rates of annual (‘reversionary’) bonuses in recent years and may well continue to do so in future years. Some other with profits funds, though, are much stronger and offer at least a reasonable prospect of competitive future investment performance.