When you invest in with profits, we pool your money with our other with profits investors in the With Profits Fund. The With Profits Fund invests across assets such as UK and overseas shares, UK commercial property and fixed interest securities.
With profits is a medium to long-term investment option. You should be prepared to keep your money invested for at least five years, ideally longer. With profits aims to offer a better return than a typical savings or deposit account over the medium to long term. We believe with profits is less risky than investing directly in the stock market due to a mix of assets and the principle of ‘smoothing’.
However, due to the nature of the investments held in the fund, it is more risky than a deposit account and you may get back less than you invested.
The value of a with profits investment normally grows when we add bonuses. For most policies there are three types of bonus. The amount of bonus we add to your plan will depend on the investment performance of the assets your plan is invested in.
Investment returns, less any tax applicable, are the most important factor in deciding how much bonus we pay. These depend on the mix of assets your policy is invested in and how these assets have performed. We also consider the following:
Historic investment returns experienced over the period of your investment.
Bonuses already declared.
Our view of future investment conditions.
When you started your policy.
The effects of smoothing. Smoothing means that in years of good investment growth we may hold back some of the investment returns, so that we can top up bonuses in years where the performance is not as good. You can find more information on smoothing in our
Understanding Smoothing (Q38839) (PDF: 42KB)
The type of with profits policy you have and the terms of your policy, including the type and extent of any guarantees.
Money built up in the With Profits Fund that is over and above what we expect to need for future obligations such as tax, expenses and future bonuses to policyholders.
Expenses charged to the With Profits Fund include regular payments into the Legal & General defined benefit pension schemes. In 2017, the Board decided to make a one off payment from the With Profits Fund which means that these ongoing payments into the pension schemes from the With Profits Fund will stop. We don’t expect this change to cause a reduction in bonus rates.
The costs of running your policy.
Any other adjustments, for example to cover an increase in the cost of guarantees and options. For the bonus declaration for 2017, there will be no adjustments.
Bonus rates are not fixed, they will vary each year as actual returns and our view of the future changes.
An annual bonus may be added to a with profits plan at the end of each year. Each annual bonus added increases the basic guaranteed amount we’ll pay out at certain contractual points, that will vary depending on the type of plan you have. Once we’ve added an annual bonus, we cannot withdraw it for payments made to you at your contractual points. For more information on contractual points, see our guides to how we manage your conventional and unitised with profits investment.
An interim bonus may be added to cover any period of time for which an annual bonus rate has not yet been declared. We will normally use the interim bonus rate to calculate the value of your plan in between annual bonus declarations. The interim bonus rate may change without notice.
A final bonus is a final addition to a plan and only applies when a claim is paid or if you move to another fund. It’s paid to make up any difference between the amount we have guaranteed to pay and the overall amount we decide is fair to pay policyholders. Final bonus rates can change without notice. Not all products are eligible for a final bonus.
What is Contractual Annual Interest (CAI) / Contractual Minimum Addition (CMA)?
These are the names given to the annual amount of growth we have guaranteed to provide on certain contracts. These guarantees could be of significant value. CAI and CMA increase the value of plans each year, as described in the plan documents.
The amount of CAI and CMA is taken into account when calculating bonuses. This means policyholders who receive CAI/CMA may receive a lower annual bonus (or no annual bonus at all) than those who do not have CAI/CMA. This is so that their overall return does not exceed the amount we consider appropriate in order to treat all of our with profits policyholders fairly.
If CAI and/or CMA apply to your plan, it will be shown on your bonus letter.
For more information on CAI and CMA, see our guides to how we manage your conventional and unitised with profits investment.
Smoothing aims to even out some of the short-term ups and downs that may be experienced when investing directly in the stock market or other investments. We smooth returns by holding back a proportion of the investment returns gained during years of good performance so that we can top up bonuses in years where the performance is not as good.
A market value reduction (MVR) is an adjustment to the amount we may pay out if you take money out of your with profits investment in certain circumstances. The amount you receive would be based on your fair share of the With Profits Fund and may mean you get back less than you expect.