In the past, long before the advent of ISAs, the closest many people got to investing in the stock market was through a with-profits policy. They were encouraged by a system involving the prospect of annual with-profits bonuses that promised to smooth out fluctuations in share prices and there was also the prospect of a final bonus at the end of the term. In the 1980s and 1990s, past performance was good but after these decades, difficult market conditions led to bonus cuts that drastically reduced the demand for with-profits and indeed the supply of this hitherto popular investment.
For Scottish Friendly, however, with-profits investments, including our with-profits ISA, continue to be a very popular investment choice for our customers – as they have been for decades now.
Originally, with-profits policies were a form of regular premium life insurance or pension policy that guaranteed a certain sum assured. Premiums were placed in a fund invested in stocks and shares, bonds, property and other assets.
Investment profits were added to the sums assured in the form of annual bonuses which, once added, could not be taken away.
But, importantly, some returns were held back in good years to supplement returns in poor years – a process known as ‘smoothing’. Investors also often received a terminal bonus when the policy matured.
Nowadays many policies, such as Scottish Friendly’s My MoneyBuilder New ISA, and the with-profits fund in our My Choice new ISA, are linked to unitised with-profits funds. For these policies, the unit price increases in line with the regular bonus rate on a daily basis. When a claim is made, final bonuses are used to smooth payouts and ensure that each policyholder receives a fair claim value.
It’s perhaps the spread of the investment mix that appeals to customers rather than all your money being placed in, say, stocks and shares or cash. So it gives people access to stocks and shares but without all their money being placed there.
When you invest in a Scottish Friendly’s with-profits ISA you need to be aware that if you cash in any time other than on the 10th anniversary, or subsequent 5th anniversaries, you may get back less than you have paid in and the value of your units may either be increased by a final bonus or reduced by a market value reduction to bring it into line with the performance of the assets within the With-Profits fund.
The number of providers offering with-profits plans has shrunk over the years and while some commentators say that selling them is like selling typewriters, this is not the experience of Scottish Friendly and a handful of larger insurers. Among our customers, demand for with-profits policies, including our with-profits new ISA, continues to be buoyant.
Find out about Scottish Friendly new ISAs here.