Terminal Bonus – What is it?Written on October 21, 2014 by Kirk Rice LLP
I recently received a statement for my Investment Bond and noticed that for once the surrender value is higher than the investment value. This appears to be due to a terminal bonus being included. What is this and should I surrender the investment to get the higher value?
Terminal or Final Bonuses are applicable to With Profits Funds which you can invest in via Pensions and of course Investment Bonds such as the one you have. A With Profits Fund will typically invest in a mixture of assets types such as UK Equities, Overseas Equities, Corporate & Government Bonds, Commercial Property and a small amount in Cash. How well the With Profits Fund performs will be down to these assets and the skill of the Fund Manager.
A proportion of any returns realised are paid to you in the form of a Bonus (typically annually) and once paid a Bonus cannot be removed. Any returns not paid out as a Bonus are retained within the Fund and can be paid out in future. As an example the underlying assets (as above) may mean the Fund realises growth in one year of say 13%. The Fund Manager may pay 4% of this to Investors as a Bonus and retain the remaining 9% to cover charges and to act as a reserve for bad years. If the following year the underlying assets drop in value and the fund therefore realises a negative return the Fund Manager can still pay you a Bonus of say 3% using the Profit retained from previous years.
This process means the returns from a With Profits Fund tend to be quite smooth and you will not see large fluctuations in values. In essence you do not fully participate in the gains during good years but equally you do not get hit by the falls during bad years. Over time the Fund Manager recognises there is profit retained in the fund you are entitled to. This will be paid in the form of a Terminal or Final Bonus but unlike the Annual Bonus this can be decreased or removed at any time.
To secure the Terminal Bonus the investment needs to be surrendered OR if the provider allows switched in to another Fund. Surrendering MAY be appropriate but I do not know enough about you to advise one way or the other; you would need to get specific advice. A final point to be aware of is that With Profits Funds can impose a Market Value Reduction/Adjustment (a penalty) upon encashment but this will generally only be during or shortly after poor stock market performance.
If you would like more advice regarding this issue or any other financial services matter, please contact us.
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THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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