With-profits funds were a type of investment offered by major insurers promising steady returns over the long term — typically, 20 to 25 years.
Their selling point was the so-called ‘smoothing’ of stock market returns.
It meant they would hold onto excess profits in good years, when the markets soared, and use these to smooth out poor returns.
On top of growth every year, savers were often promised an annual bonus — and were usually given a large ‘terminal’ bonus at the end of the term.
These were particularly popular in the Eighties and Nineties when the stock market was riding high. Commission-hungry salesmen often sold them as a way to pay off the capital loan on an interest-only endowment mortgage or as pension schemes.
Initially, with-profits funds did as they promised, as the Thatcher years saw an economic boom. But when the stock market began to slow in the early Nineties, the actuaries who ran the insurers’ funds kept on paying out far too much.
Only when the impact of falling markets finally began to hit home on the with-profit funds’ bottom line did payouts on these policies begin to plunge.
In 2000, a maturing Standard Life with-profits policy into which a 55-year old investor had put in £50 a month for 25 years paid out £110,373. This year, a maturing policy on the same terms would give you just £26,891.