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"with-profits" bonds

This section of the website describes how we approach complaints involving "with-profits" bonds.

With-profits bonds are lump-sum investments that usually have no set term or fixed maturity date. The consumer's money is invested in the provider's with-profits fund.

The value of the initial investment accumulates through the addition of bonuses - the value of which is decided by the provider's actuaries. Bonuses are usually added every year - based indirectly on what the fund has earned - and once added, they cannot usually be taken away.


Many of the cases we see involving with-profits bonds involve:

the sale and suitability of "with-profits" bonds

When a with-profits bond was sold in an "advised" sale - that is, when a provider gives a consumer advice or a recommendation - disputes can arise about whether this kind of bond was suitable for the particular needs of the consumer.

Our approach to considering whether an investment was suitable is described in more detail in the section of our online technical resource on assessing the suitability of investments.

Cases involving the suitability of a with-profits bond will usually raise questions about the level of investment risk the consumer wanted to take in the particular circumstances of the sale, their need to access capital , and any requirements for regular income.

investment risk

With-profits bonds are generally considered to represent a lower risk than investments that are linked directly to the stock market. This is because:

  • with-profits funds usually include a mixture of assets, including those that are more secure;
  • when determining the value of bonuses, providers apply a process of "smoothing". This means that money is kept back in years when investment returns are high to support bonus payments in years where investment returns are lower; and
  • annual bonuses cannot usually be taken away once they have been added.

For these reasons, with-profits bonds are usually considered by the financial services industry to be suitable for most consumers, including those with a more cautious attitude to risk.

However, with-profits bonds are not risk-free. Some bonds are subject to early surrender penalties, which usually apply during the first five years. And market value adjustments (MVAs) could be applied to withdrawals at any time.

It is possible to lose money, so a with-profits bond would not usually be suitable for a "risk averse" consumer.

access to capital

Because of the early surrender penalties that usually apply for the first five years, we are likely to conclude that a with-profits bond would not have been a suitable recommendation for a consumer who would have needed to access to some or all of their capital within this period (that is, more than regular income withdrawals planned when the investment started).

We are also likely to conclude that a with-profits bond may not have been a suitable recommendation for a consumer who needed access to their capital at a fixed point in the future - or who could not be flexible over when they may need to cash in their bond.

In both situations, we will consider whether an adviser was aware or should have been aware of the consumer's needs.

We may also need to consider access to other savings or investments that could provide flexibility to meet the consumer's needs.

case study 1

Mrs A was 80 years old and had no previous investment experience. She was advised by financial business P Ltd to invest a large proportion of her money into a with-profits bond. We noted that on P Ltd's "risk profile" for Mrs A, it had referred to her as a "risk averse" investor and had noted that she had no other assets to provide further capital.

We concluded that because with-profits bonds are not risk free - particularly when they are being used to provide a regular income - the advice to Mrs A to invest in a with-profits bond had not been suitable.

requiring a regular income

The tax treatment of withdrawals from with-profits bonds is complex and varies according to whether the bond is an onshore or offshore investment. HMRC is responsible for calculating the extent of any tax liability.

HMRC classifies an investment bond as a "non-qualifying" contract. The rules allow annual withdrawals of 5% per year of the original capital invested without incurring an immediate tax liability. If the allowance is not taken in a particular year, it "rolls over" and can be taken in a subsequent year.

The 5% allowance is available for 20 years and is deemed to be a return of capital rather than interest or growth on the investment.

Provided withdrawals are kept within the specified limits, any additional tax on the withdrawals (over and above what has already been paid within the fund) will only normally become payable when the bond is encashed.

The tax treatment of investment bonds can be complex and this note is not intended to provide a definitive guide. But the current tax treatment of withdrawals from with-profits bonds often allows a consumer to avoid paying higher-rate tax on withdrawals from a bond - where they are a higher-rate taxpayer at the time of sale and a lower-rate taxpayer at the time they cash in their bond (perhaps because they have retired). Although these features can make with-profits bonds attractive to consumers looking to generate an income, we would not usually consider the tax benefit alone as sufficient evidence that it had been a suitable recommendation to a consumer.

We also consider the extent to which a consumer is dependent on receiving a particular level of income - and whether they can afford to lose any of their capital.

A downturn in financial markets is likely to lead to low or falling bonuses - and to MVAs being applied. So we are more likely to decide that recommending a with-profits fund to generate income was not a suitable recommendation when market conditions and bonus prospects are poor - and when MVAs are already being applied.

case study 2

Mr C retired and found that his pension only just covered his living expenses. He received advice from financial business R Ltd to invest the majority of his capital in a with-profits bond. Mr C complained when the bonus rate on the bond was reduced to zero. R Ltd explained that an MVA would be applied if Mr C cashed in the bond.

We decided that a with-profits bond had not been a suitable recommendation for Mr C because he was totally reliant on the investment to provide a steady level of income. The possibility of falling bonuses and MVAs meant that a with-profits bond could not be guaranteed to provide the steady level of income he needed.

market value adjustments (MVAs)

"Market value adjustments" are sometimes called market value reductions or abbreviated to MVA or MVR. They were relatively rare in the 1990s but became more common from 2001 onwards. MVAs are effectively a mechanism that allows a with-profits fund provider to determine a consumer's share of the value of the fund when they decide to cash in their bond. MVAs can also apply to other with-profits products, including endowments and other policies.

MVAs are usually applied when there has been a reduction in the value of the fund - to make sure that the surrendering investor doesn't receive more than their fair share. They are usually seen by the fund provider as a temporary measure that will be removed once the business feels that its funds have recovered sufficiently.

Most fund providers agree that it would be unfair to apply an MVA when a consumer has died, or when a policy has matured.

Some allow policyholders to make regular withdrawals with a guarantee that MVAs will not apply. However, these are generally capped between 5% and 10% per year.

which issues do we see relating to MVAs?

If an MVA is applied when funds are withdrawn, it can reduce a policy's projected value significantly - and can come as an unpleasant shock to the consumer.

Consumers sometimes complain that the possibility of an MVA applying was not explained to them - and that they would not have purchased the bond if it had been explained to them. The outcome of these kinds of complaints usually turns on two factors:

  • the underlying suitability of the product; and
  • the policy wording and product sales information.

In some cases, the consumer's complaint about the application of an MVA may relate to an underlying mismatch between their "attitude to risk" at the time of the sale and the product involved. In these cases we will consider whether the consumer was a cautious investor or someone who did not want to take any investment risk.

Our general approach is that the possibility of an MVA applying is an important feature of with-profits policies - and is something that a consumer would want to understand before they invested.

MVAs were rare before 2001, so we would not generally expect a financial business to have highlighted the possibility of an MVA alongside other risks at the time of the sale. But after 2001, MVAs became more common - and in assessing complaints, we would investigate whether the MVA had been discussed in more detail, especially with more cautious or less experienced consumers.

However, regardless of when the sale took place, we would investigate whether MVAs were clearly explained in the policy document, the policy literature, and preferably in the "reasons why" / "suitability letter" as well.

In examining whether the consumer should have been aware of the existence of an MVA, we use the "reasonable person" test. In other words, would a reasonable person without any specialist financial knowledge have been able to understand from the policy wording (and the point-of-sale information) when an MVA might apply and how much it might be?

It is not normally possible to predict the exact amount of an MVA that may or may not apply in the future. So we look at the wording to check that it is not misleading in suggesting that any deduction would be small, or that it would apply only for a short period of time.

Similarly, we may decide that MVAs described as occurring only in "exceptional" circumstances - or highlighted as a rare event - are difficult to justify where MVAs already apply in the fund, or where the application of MVAs is under active consideration.

Where we decide that the explanation given in the documentation was unclear or misleading in a particular case, we need to consider whether this influenced the consumer's decision to invest. We may conclude that the consumer would not have proceeded if they had received an appropriate explanation of MVAs. But this will not always be the case.

case study 3

Mrs D received advice from financial business S Ltd to invest in a with-profits bond in 2003. Mrs D had no experience of with-profits bonds and had no other investments. We noted that S Ltd's "risk profile" for Mrs D stated that she only wanted to make "low risk" investments.

When Mrs D surrendered the bond, an MVA was applied and she complained that she had not known about the existence of MVAs. We decided that, although MVAs were briefly explained in the product policy and literature, this was not a sufficient explanation.

The advice to invest had been given at a time when MVAs were commonly applied by bond providers. We decided that S Ltd should have been aware of this. Had Mrs D been told this, as an inexperienced investor with a "low risk" profile, we concluded that she would not have invested in the with-profits bond.

case study 4

An adviser recommended to Mr E that he invest a significant amount of his savings into a with-profits bond. After five years he became concerned after reading in the press about fluctuating bonus rates and MVAs.

He complained to the business. He said that he had not been told that an MVA could be applied if he surrendered the bond early - and that if he had known, he would have put his money in a more secure and accessible investment.

Mr E's circumstances suggested he was looking for a better return than he would have received if he had simply left his money in a deposit account. We also found that he had readily accessible funds elsewhere - and so had been prepared to leave his money invested for a longer term.

The product literature clearly explained the features of the bond and included a warning that MVAs "might be applied on early surrender". We did not uphold the complaint.

the management of the fund and the application of an MVA

Where a consumer says they would not have invested if it had been explained to them that an MVA would apply, we would usually expect a "tied agent" to know if the financial business they were "tied to" was applying MVAs at the time of sale. If the recommendation was made by an independent financial adviser, we would also expect the adviser to have been able to find out whether a provider was applying MVAs at the time of sale.

The fact that MVAs were in place at the time of sale does not mean that we will uphold the consumer's complaint. We will look at each case on its own merits. This includes deciding whether it had been a suitable recommendation, and whether the existence of the MVA affected the suitability of the with-profits bond for that consumer.

If we find that MVAs were already being applied, and that it was not specifically drawn to the consumer's attention, we consider whether the consumer was given a fair representation of the product - and crucially, whether this would have affected their decision to purchase it. While we may often decide that the consumer would not have proceeded, this will not always be the case.

case study 5

Mrs F was an experienced investor and although she had not invested in a with-profits bond before, she had a number of other investments. Most of her investments were considered high risk and she had asked the business for a less risky investment (still giving some return) to balance her portfolio.

We considered the instructions that Mrs F had given the business at the outset. Given that she had specified some risk, we were satisfied that a with-profits bond had been a suitable recommendation for her.

There was no evidence that Mrs F was told specifically that MVAs were applying to the fund at the time of sale - either by the adviser or within the product literature. However, after she took out the bond she was given a number of "surrender value" quotations - which included details of the MVA that would apply.

Although Mrs F was not specifically told that MVAs were already being applied when the bond was taken out, we were satisfied that she had later become aware of their existence and application. Mrs F had not complained about the MVAs after receiving the surrender quotations. On balance, we were satisfied she would still have entered into the bond even if the adviser had pointed out at the outset that MVAs were already being applied. We did not uphold the complaint.

complaints about the size and timing of an MVA and the operation of the fund

We would not normally consider a complaint about the timing or size of an MVA. Under rule 3.3.4 (11) of FCA's "DISP" rules (the complaints-handling rules that businesses must follow), we may dismiss a complaint if it is about "a legitimate exercise of a financial business's commercial judgement". A business imposing an MVA would usually fall into this category.

We sometimes receive complaints about the investment management of a fund. These include complaints about the perceived lack of active management. We also receive complaints that the asset mix after the sale was less exposed to a wide range of asset types than the consumer had expected. This may happen when a fund has been closed. We discuss these concerns with the regulator on a case-by-case basis.


Where a complaint does not involve an MVA and we decide that a sale was not suitable, we generally consider appropriate redress to be putting the consumer in the position they would be in if they had been given suitable advice.

Where a complaint does involve an MVA, one way of putting things right is to allow the withdrawal without deducting the value of the MVA.

We will generally tell a business to pay redress at a rate that reflects the lost investment opportunity. But if we decide that the consumer would have retained the money (or invested it in a bank or building society account) if they had not invested it in the with-profits bond, it might be appropriate to apply interest instead.

More information about our general approach to compensation for being deprived of money and for investment loss is available on our online technical resource.

Whatever the circumstances, we will look at each case on its own merits - and decide on the fairest way to put things right in that particular case.

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