Personal Finance: The steady choice for a smooth operator

MANY COMPANIES are experiencing record sales of with-profits bonds. But what kind of investor should consider buying one, and have current market trends added to their appeal?

At its simplest, a with-profits bond is a life assurance policy set up as a lump sum investment into the with-profits fund of a life assurance company. They are not suitable for every investor and should rarely form 100 per cent of an investment portfolio.

If money is to be invested for less than five years, then the most suitable place is often a deposit account, unless you are prepared to take a gamble in the hope of a quick profit. Similarly, someone prepared to accept large falls in return for potentially large gains may feel that this more secure and steady form of investment is not for them.

A with-profits bond pays its return to investors by declaring a mixture of annual and terminal bonuses. The annual bonuses are generally added on a daily basis and a terminal bonus may "top up" the return upon encashment.

With-profits funds tend to be well-spread and target investment towards stocks and shares, property and fixed-interest investments.

Although all these asset classes can be volatile, the life insurance companies use their reserves to "smooth" the return to the investor. In times of strong market gains, instead of paying all the gains in high bonuses a company will hold on to some of the profits. In turn, when times are leaner, they will use some of the profits stored up to support the bonus rate.

Investors seeking income can make regular withdrawals from a bond. An increasing number of retired investors are using this facility to boost the returns they are getting from deposit based investments. Bond sales are also being boosted because life insurance companies are able to point to strong past performance. The average with-profit bond has achieved an annual rate of return of more than 9 per cent, net of basic-rate tax, over the past five years to 31 August 1999 (according to the With Profits Bond Shop).

The independence of the Bank of England has built the foundation of low inflation and, as such, interest rates, (currently on the rise and still way above European rates) may fall in the medium term. Short-term concerns over house price inflation will need to be balanced against the risk of the Bank undershooting its 2.5 per cent target.

Against this backdrop and the volatility recently demonstrated by the UK and US stock markets, many investors find the smoothing offered by with-profits bonds appealing. Lower deposit rates, coupled with the strong track records being built up by many providers, make them an investment worthy of consideration in many people's portfolios. However, knowledge is power and if you are considering this type of investment you should know that research can prove extremely valuable.

If you would like to find out more about with-profits, `The Independent' has produced a guide, sponsored by the With Profits Bond Shop.

For your free copy write to FREEPOST MID17891, Nottingham, NG1 6YA.

Or telephone 0115 958-7555