Protect With Profits Bonuses from a Stock Market Crash

The last 12 months have been volatile with Trump Tariffs and geopolitical risks in Gaza, Russia/Ukraine, China, Taiwan, Frances political turmoil and more.  Notwithstanding our own economy and higher taxation fears. 

On average, for the 9 stock market indices that we track as part of our weekly ‘Traffic Light Alerts’, the return over the last 12 months has been +32%.  Many investors are starring to become fearful of a correction (-10%) or a crash (-20%).  We have seen cryptocurrency as well as gold set new records as investors look for ‘save havens’.

We have warned our clients many times about locking down and taking some or all of their profits and moving to cash, money market or bond, gilt and fixed interest holdings.  Some have; some have not.

Impact of Stock Markets on With Profits Funds

A with profits funds is designed to smooth out the peaks and troughs on investment markets.  That said, most ‘with profits’ funds have around 75%-85% invested in stock markets, so are impacted by the peaks and troughs of markets.

With profits funds are made up usually of:

• A yearly/annual bonus.  Once added, the yearly/annual bonus cannot be taken away
• A terminal/final bonus.  Usually added at the end of the policy when it matures or is cashed in.

Annual Bonus

A ‘smoothed out’ bonus is designed to be added each based upon investment gains and losses over that year and previous years.

• In good performing years, a bonus is declared and added to your policy but some of the gains are kept back in reserves for the poor years.
• In poor performing years, a bonus is declared and added to your policy but paid from some of the gains that were kept back in reserves.
• Annual bonuses can have a ‘market value adjustment’ (MVA) applied to them (a penalty in all but words) if annual bonuses are higher than the underlying stock market performance if markets have corrected or crashed.

Terminal Bonus

If at the end of the policy, maturity, or cash in, you may also receive a terminal/final bonus if there are any reserves still left for your share of the with profits fund.  The terminal/final bonus can be increased or decreased.  It varies and depends upon market conditions and whether there are profit reserves still 'stored' in the fund for when your policy matures/ends.

Terminal/final bonuses can be reduced, taken away, and even cancelled if markets tumble.

If a large part of your ‘with profits’ fund is terminal bonus you should seek advice on whether you should lock it in.

Stock Market Crashes

As a general rule, when stock markets fall, your ‘with profits’ fund will NOT fall in value as it has been designed to smooth out the peaks and troughs of markets. 

That said, if you try to cash in your investment early, in normal times you should have no problems but in extreme market falls and if the bonuses you have had are higher than the value of assets in the fund i.e.  all reserves used up and you have more than the fund is worth, policy providers may impose a Market Value Adjustment (MVA) on your plan.  Sometimes known as an MVR market value reduction or a MVAF market value adjustment factor.

In simple terms, stock market falls do not instantly affect the value of a with profits fund, but they may do if market falls are significant and in place for a longer period.

Considering locking in stock market gains and protecting some profit?  Don’t forget to review your ‘with profits’ funds too.

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