Glossary · UK
What is With-Profits Fund?
A pooled investment fund, common in older pensions and endowment policies, that smooths returns over time using annual and final bonuses rather than passing on market movements directly.
Full Definition
A with-profits fund is a pooled investment fund, historically common in older-style pensions, endowment policies and some insurance-based savings products, that aims to smooth an investor's returns over time rather than passing on the full ups and downs of the underlying stock market and bond investments directly. The insurer holds back some investment gains in strong years, building up reserves that are then used to support bonus payments in weaker years, so a with-profits policy typically adds an annual bonus (once added, generally guaranteed and not taken away) and, at the end of the policy term or on a claim, a final (terminal) bonus reflecting the overall performance of the fund over the whole period the money was invested. Because the smoothing mechanism, the insurer's reserves, and the bonus-setting process are not fully transparent to individual policyholders in the way a straightforward tracker fund or unit-linked fund is, with-profits funds have often been criticised for being opaque and, in some cases, for reflecting the insurer's wider financial position (including exit penalties known as a "market value reduction" applied if a policyholder cashes in during a weak period) as much as the pure investment performance of the underlying assets. With-profits products were widely sold in the UK from the mid-20th century through to the early 2000s, particularly as endowment policies linked to interest-only mortgages, but new sales have declined sharply since then in favour of simpler, more transparent unit-linked and tracker fund alternatives, meaning most people encountering a with-profits fund today are reviewing an older policy taken out some years ago rather than considering a new one.