With-profits cautious answer to cash savings?

20 September 2021

Cautiously managed with-profits funds could pose a potential solution for investors with excess savings in cash, says Healthy Investment.

It follows a report from the FCA published earlier this week which is seeking to encourage many of the 8.6 million UK savers who have cash holdings of more than £10,000 to consider investing their money to beat to prevent inflation eating into their savings.

Unlike unit-linked investments, Healthy Investment said with-profits funds do not pass all investment returns or losses on to investors in real time. Instead, they hold back a proportion of positive returns in years of stronger performance to mitigate falls in value during weaker markets. Many funds also provide capital guarantees as well as guaranteeing that any annual bonuses added during the course of the policy will be honoured.

Investors receive their returns in the form of bonuses that are added to the value of their investments, including annual reversionary bonuses, interim and final terminal bonuses.

Peter Green, chief executive of Health Investment, said: “Risk means different things to different people but if you are holding cash at the moment you are virtually guaranteed that the buying power of your savings is falling year on year. With-profits funds aren’t equivalent to cash but if you are able to give up some of the flexibility that comes from holding your money on deposit, they can often be a useful alternative.

“Many providers guarantee that you will get your money back plus the value of any annual bonuses if you hold your policy for an agreed period so it can be one of the most secure ways to invest. When you remember they also enjoy better FSCS protection than most cash savings, I believe that cautious with-profits funds should be on the radar of anyone who takes a relatively conservative approach to risk but is willing to trade an element of flexibility for the potential to beat inflation.”

Commenting, Guy Vanner, managing director, AKG Financial Analytics, warned that With Profits was not a direct replacement for cash. He said: “There looks to be something of a renaissance for With Profits, with an increasing number of providers now again offering this as an option in the intermediary market.

“It is, however, important to take into consideration that the risks involved in a With Profits investment are greater and more varied than investing in cash, with which it is not directly comparable, and that any guarantees generally apply only at limited and specified times.

“For an adviser looking at an investment with the potential to outperform inflation, however, With Profits could well be a useful part of the toolkit but as with consideration of any investment solution will come with a requirement to research and understand With Profits providers and funds.

Professional Paraplanner