Different Types of Bonds
With-Profits Bonds
A with-profits bond is the term associated with
life assurance plans that put your investment in a with-profits
fund. With-profits bonds distribute your money across different
types of investments (e.g. shares, cash deposits and fixed interest
securities) in order to balance out the constant losses and gains
dealt by the overall market.
The idea behind this is to reduce
the amount of risk while maximising the return on your investment.
This puts with-profits bonds at
a risk level above traditional savings accounts, but still below
the volatile equity funds market (e.g. stocks and shares).
A fund
manager invests the capital pooled from the funds of the policy
holders. The capital is spread out among a diversified
portfolio of shares, securities and stocks.
Every year, the
life assurance company declares a reversionary bonus rate that
is applied on a daily basis to the participating
policies. The company’s actuarial department derives
the bonus rate from how much it assesses the fund will earn
after all
related expenses and costs are accounted for. The reversionary
bonus rate is not guaranteed and the amount depends on many
factors. However, once it is applied it is not taken back.
The current bonus
rate is commonly around 5.5%.
Although considered as medium
to long term investments, with-profits bonds do not have
fixed terms. Withdrawals are typically
not allowed until five years have elapsed; after this period,
regular
withdrawals
are permitted. Usually, withdrawals of up to 5% of the
initial sum are tax-exempt, and the arrangements are often flexible
so you can opt to schedule withdrawals annually, bi-annually,
quarterly
or even monthly.
Keep in mind however that some established
IFAs are advising against with-profits bonds for new investors,
given the
present and forecasted
conditions of the stock market that may make other investment
options more profitable.
