However, that is no longer the case and UK with-profits funds have performed badly in recent years and are now languishing way behind other investments. In my opinion, some of the insurance companies who provide these funds are just not playing fair.

Many insurance and pension companies, including well-known names like Pearl, Phoenix, NPI and Scottish Widows, slashed their reversionary or annual bonus rates a few years ago when the markets took a severe downturn. Unfortunately, despite three years of almost steady growth in the stock market to date, few have increased them back up to anywhere near what they were previously. In some cases, annual bonus rates are still as low as 1 per cent per annum or even zero in some cases.

Terminal bonus rates (typically added to the accumulated fund at maturity) have also been slashed.

Another factor causing many with-profits investors problems are the Market Value Adjustments (MVAs) applied to with-profits investments.

As a result of the poor bonus rates being paid, many investors have been looking to surrender and move their money into other investments with better returns and higher income yields.

To stop this happening, the pension and insurance companies applied MVAs, effectively an encashment penalty charged against investors' funds.

In some cases, these penalties have been as high as 29 per cent of the fund value, effectively trapping policyholders in an under-performing investment or pension fund.

Moving your money out of these funds and incurring such large reductions in the fund value would at first sight seem to be a reckless proposition.

However, in some cases, by cutting your losses now and getting out of these with-profits investments sooner rather than later, you could actually be better off than by sitting tight and hoping for the best.

Many investment companies currently offer enhanced allocation rates for larger investments in order to attract more new business. A typical example is AXA, who would offer an allocation rate of 103 per cent for an investment of £50,000. That extra allocation rate could actually offer a way out of with-profits, with minimal capital loss for some investors.

For example, if you surrendered a with-profits bond with a value of £55,000 and suffered an MVA penalty of 7.5 per cent, you would suffer a loss of £4,125 of your capital, leaving you with £50,875.

If you invested that £50,875 into a new AXA investment bond, the 103 per cent allocation rate will boost it to £52,401. If your financial adviser then adds another 5 per cent by surrendering some of the commission he or she is paid by AXA, the allocation rate would be £108 per cent, which would increase your investment to £54,945 on day one. That would boost your capital back up to within £55 of the pre-surrender value of the old bond.

If you invested the above sum into the AXA distribution fund, you can expect a natural annual income yield of around 4.5 per cent or £2,472 a year ongoing, which can be re-invested if you do not need an income.

That means you will have completely recovered your capital position, plus some growth within a year.

If you have been saving for retirement into a traditional with-profits personal pension plan, it may also be worth considering a transfer of your fund into a stakeholder-friendly personal pension. The fund management charges you pay will be lower and the potential for a better return on your money by the time you retire will be greater.

Ask your financial adviser to carry out a pension transfer analysis for you. You might get a pleasant surprise.

Although moving your money out of with-profits may not work for all investors, it is worth checking out your own options. After all, with current bonus rates as low as zero in your with-profits fund, is staying put really a viable option?


Nick Plumb is an Independent Financial Adviser.

Send your questions to him at Bright Financial Planning Ltd, 58 Station Road, Sudbury, Suffolk, CO10 2SP, email them to nickplumb@aol.com or telephone Nick on 01449 675674.

Nick's answers to reader questions in this column are provided only as a general guide and do not constitute personal financial advice.

Any readers who require specific financial advice on their own position should contact Nick for a complimentary consultation.