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Graham
Field
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With low interest rates and low growth now the norm, keeping one's financial plans under review is more important than ever.
Unit-linked or With-profits: What's the Difference?
If you’ve ever had a session with a financial planning adviser, you will have heard about unit-linked and with-profits investments, but what does the jargon actually mean in practice?Unit-linked Investments
These put the sum invested directly into an investment fund, chosen by you from those offered by the company. You can elect (say) to invest in property, if that appeals, or equities if you prefer. You control how your money is invested in each fund. The funds are divided into ‘units’, which you buy, and the value of each unit depends directly on the underlying performance of the investment fund. Typically there is a difference (usually 5 per cent) between the price of the units which you pay when you purchase and that which is repaid if you encash the investment. This is called the ‘bid/offer spread’. Additionally, there will be a ‘management fee’ (usually 0.5 to 2 per cent of the value of your fund) payable at the year-end. You ‘ride the markets’ directly, gaining on rises and losing on falls.In the first year or two of a regular savings plan, a different type of unit (a ‘capital’ or ‘initial’ unit) is normally allocated, which carries a higher charge than the later (‘investment’ or ‘accumulation’) units. These usually carry a large penalty in the event of early encashment.
The idea is that this method allows fluctuations in the market to ‘smooth out’ on the basis that if market prices rise, the number of units bought per £1 falls and vice-versa. This is called ‘pound-cost averaging’ in the financial services business.
The great plus of these investments is that you can look at the financial pages of the newspaper and work out exactly what they are worth if you know how many units you own.
With-profits Investments
With profits investments have profits added to the investment value annually. Because they are guaranteed, they cannot go down in value unless the company itself gets into difficulties. In spite of the Equitable Life saga, this is not usual.
While the charging structure is similar to unit-linked policies, the charges are hidden. Also, the value of the investment isn’t known until it is encashed, because these investments typically rely on a ‘terminal bonus’, which will be as big as the actuaries dictate! Latterly, insurers have been cutting terminal bonuses.
These policies do have two other advantages, however. Because they are relatively safe from falls, they can be used as security for loans at good rates of interest or can be sold to someone else for a relatively small loss compared with cashing them in with your insurer. Also, if bought from a mutual insurer, they normally make you a member…bringing a windfall profit if the society demutualises.
