Common questions

We believe they are good value but we're aware that, particularly with old style with profits funds, there was some confusion among investors because of the way bonuses were added. Often these with-profits funds provided good returns for investors, but future bonuses were unpredictable and depended on market conditions. We appreciate this wasn't always easy for investors to understand. That's why we introduced our new generation with profits funds. While they don't have guarantees, they do aim to smooth out the ups and downs of the stockmarket by holding back money in the good years and topping up in the bad, although smoothing won't be able to counteract the effects of a sustained decline in the underlying investments.

There are many alternatives for cautious investors including cautious managed funds which invest in a mix of investments with the aim of reducing the risk of being too exposed to one type alone. There are absolute return funds that aim to provide positive returns in all market conditions and there are some protected funds that aim to limit an investor's potential loss to a fixed proportion of their investment. However, these are very different types of fund, both from each other and from with-profits so you should be sure you understand the risks involved. Few of these options offer any kind of guarantee and in most cases there is a possibility that you might not get back the amount you invested. The key thing you should be aware of if you're already invested in with-profits is that you could well be giving up some valuable guarantees if you leave. It’s crucial that you consider this – some of our with-profits growth guarantees are as high as 5.5% a year and there may be a penalty if you leave early. There are no guarantees with our new generation with-profits funds, but unit prices are smoothed, giving you protection against stock market fluctuations. Remember that although smoothing can provide a certain amount of protection, it can't cancel out the impact of a sustained fall in investment returns.

One of the key factors in the long-term performance of our traditional and unitised with-profits funds is what we call ‘the estate’, which is the excess of the total assets of all our with-profits business over the amount needed to meet the corresponding liabilities. We don’t keep any of it as profit or pay it to shareholders – we share it out between all our with-profits investors. We expect, but can’t guarantee, that it will add around 1% each year to your final payout. We can't guarantee this is better than our competitors but you could ask them what the position is with their 'estate' on with-profits business.

We increased underlying asset values (which bonuses are based on) from the estate by 0.75% in both 2004 and 2005, 1.25% in 2006 and 2007, and 0.75% in 2008 and 2009 and 1.00% in 2010. However, please be aware we can't guarantee the level of future increases or indeed if there will be any.

Transparency has improved substantially in recent years. Firms now have to set bonuses for traditional and unitised with-profits in accordance with the published Principles and Practices of Financial Management, take advice from a with-profits actuary and have their decisions reviewed by an independent body, such as a with-profits committee.

Traditional and unitised with-profits payouts are a combination of guaranteed benefits, yearly bonuses, final (also known as terminal) bonuses and/or market value reductions (MVRs). In line with the financial services industry, we historically reviewed final bonuses once or twice a year, and the amount depended on how many full years you’d been invested. This is still the case for a lot of firms and means that payouts can change substantially from one bonus declaration to the next, as well as on policy anniversaries. Since 2006, our final bonus rates (and MVRs) have changed every three months and vary according to the year and month you invested. This limits how much payouts can change between bonus declarations, and prevents any artificial changes around policy anniversary dates, so we pay out a fairer amount.

Some of our traditional and unitised funds do have low equity contents, around 20%. This is because they aim to provide higher guarantees so, to provide these, investments had to be restricted to lower risk investments with more predictable returns than equities. In these cases, we reduced equity backing ratios (EBRs, the proportion of the fund invested in equities) ahead of the equity market falls in the early 2000s. Other funds such as our High Equity With Profits and With Profits Performance Bonds offer lower guarantees and saw EBR reductions during the early 2000s, but EBRs in these funds have remained between 52.5% and 57.5% since 2003. Our new generation with-profits funds, which don't offer guarantees, are risk-graded to allow investors to choose the level of risk they're prepared to take. The With-Profits Growth fund typically has around 80% invested in equities, while the With-Profits Cautious fund has around 40% invested in equities.

Our with-profits payouts have been competitive for many years, and although we expect them to stay that way, we can't guarantee the amount you'll receive in future. This is because it depends on the fund you're invested in, the performance of the underlying investments and any smoothing increases or reductions we apply.

Smoothing won't be able to counteract the impact of a sustained decline in investment returns.

None of our with-profits funds has any investment in property so don't have any liquidity issues.