Britain's worst investments!

We have 25 million of these policies, but their returns are truly awful.

One of the biggest financial mistakes of my life was to buy a with-profits mortgage endowment at the tail-end of 1992.

Indeed, thanks to a combination of high charges and commissions, poor investment returns and low bonuses, my mortgage endowment has turned out to be a complete flop. After paying monthly contributions for 17½ years, my savings plan is barely worth more than I’ve paid in!

From with-profits to without-profits

Alas, I’m not the only unhappy owner of a with-profits policy. A recent survey by Money Management magazine found that the average with-profits endowment policy grew by just 1.7% over the past decade. Turning £1,000 into £1,017 over 10 years is a truly dreadful return, agreed?

In theory, by spreading our money around (across shares, property, bonds and cash) and ‘smoothing’ investment returns through yearly and final bonuses, with-profits funds should produce decent, steady returns. In reality, they have been a big let-down since the turn of the century.

According to a comprehensive review of the with-profits sector by City regulator the Financial Services Authority (FSA), we have around £330 billion invested in 25 million with-profits policies. Regrettably, the FSA found that, although some firms were performing satisfactorily, others were failing to treat their policyholders fairly.

The FSA pinpointed two areas of concern for policyholders:

• Ineffective governance of with-profit funds, which means that policyholders' interests may not be properly protected; and
• Significant weaknesses in the quality of consumer literature, with policyholders not receiving sufficiently comprehensive, timely and clear information to help them understand their policies.

To address these concerns, the FSA has ordered firms to take action quickly to improve their operations. The FSA expects all with-profits providers to raise their game, with several firms directed to make immediate changes to their governance arrangements to better protect policyholders' interests.

What’s more, two firms have been referred to the FSA's enforcement division for further investigation. This suggests major failings on the part of these with-profits providers, and could lead to disciplinary action and possible fines for failing to meet the FSA’s ‘clear, fair and not misleading’ principle.

Poor communication means more complaints

The FSA’s review into with-profits policies involved in-depth visits to 17 firms (representing 80% of assets in with-profits funds) between September 2009 and February 2010.

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During this review, the FSA found significant problems with after-sale communication to policyholders regarding market value reductions (MVRs). If a policyholder decides to cash in a with-profits policy early, then an MVR may apply. Depending on market conditions, this withdrawal penalty could knock up to 18% - almost a fifth - off a policy’s encashment value.

However, at certain times during a policy’s life, investors can apply to cash in their with-profits policy without paying any MVR. Typically, this happens at a pre-set time, such as the tenth anniversary after the policy has started.

Unfortunately, some policyholders were not made aware of these ‘penalty-free exit points’ and have lost out financially as a result. Hence, the FSA is urging policyholders who were not properly informed of their no-MVR dates to make a formal complaint to the Financial Ombudsman Service (FOS).

Yet another mis-selling scandal

The eighties and nineties saw widespread mis-selling of with-profits endowments, savings bonds and pensions. Thus, it’s possible that millions of policyholders may not have been given clear information on when MVRs would not apply.

One financial adviser, www.withprofitshealthcheck.com, reckons that policyholders stand to lose up to £1 billion thanks to poor communication of MVRs. That adds up to thousands of pounds per surrendered policy.

Therefore, if you weren’t told about MVR-free dates at relevant times, at regular intervals, or when surrendering a with-profits policy, then you may well have cause to complain. First write to your with-profits provider. If it fails to play ball, then ask for a ‘deadlock letter’ with which you can approach the FOS. Otherwise, you could lose out to the tune of £1,000 or more!

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