mowatt financial Planning

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Mowatt Financial Planning: February 2011

Wednesday, 9 February 2011


With-profits is a particular type of investment that can be one of the investment options in an investment bond or a pension.

The terminology dates back to the origins of the mutual life insurance industry. In the beginning the policies sold were based on a premium being paid and the policyholder getting a guaranteed amount back. For example, this could be a life insurance policy or a savings policy. As time went by the prudence of the actuaries meant that a surplus was built up. As there were no shareholders, a mechanism for sharing this surplus evolved whereby certain policies participated in profits and these became known as with-profits policies.

The investment world has moved on significantly since these early days and in my opinion investors are generally better served by a fund or portfolio of funds which is designed to fit their risk appetite. What you get from a with-profits fund can vary widely from one provider to another. As an example, the Friends Provident with-profits fund had an equity content of 9% in 2009 whereas the Prudential fund had 50%. As an individual you have no control over this as it is at the discretion of the provider.

It is estimated that 25 million people own with-profits investments worth a massive £400 billion. This figure will include endowments as well as investment bonds and pensions.

It is a good idea to review the appropriateness of any with-profits investments that you have as there are often more appropriate options available for your individual circumstances.

Wednesday, 2 February 2011


The inflation figures recently announced for December were 3.7% (CPI) and 4.8% (RPI). The largest upward pressures in December were air transport, fuel and lubricants, gas and food. More detail is available on the ONS site.

The expectation is that these have further to rise and are likely to stay above the target inflation rate of 2% during 2011. This is likely to be driven by the recent increase in VAT and the increasing cost of imports.

Now these are averages and the inflation rate that any individual experiences will depend on their spending. The Office of National Statistics have developed a Personal Inflation Calculator which works out your personal inflation rate based on your expenditure. Inflation for the Mowatt family household comes out at 6.5% for December 2010. Obviously buying the wrong stuff!

In a similar vein, Age UK recently developed a measure called the silver RPI which is aimed at looking at the inflation rate of those in later life. They found that the rate of inflation increased with age. The table below shows the additional rate of inflation above the average RPI by age band:

Age Band Additional rate
55-59 1.8%
60-64 2.6%
65-69 3.3%
70-74 3.8%
75-79 4.1%

There are a number of factors which affect this but for example the 75-79 age band spends twice as high a proportion of their income on energy compared to the 55-59 age band.

This brings us to the so what? There is a real dilemna here. Since the withdrawal of index-linked savings certificates, it is difficult to find a safe investment to protect against inflation. Of course if you already have some you can roll them over.

Currently the only deposit based option is with Birmingham Midshires which has a 5 year bond available paying inflation plus 0.25%, however, the interest will be taxed. Beyond this it is possible to invest in index-linked gilt funds although the capital is not guaranteed in this case. Other assets which have traditionally provided some protection against inflation are property and equities. The capital risk is higher with these assets.

My view is that there is a need to take some risk with capital to give protection against inflation, otherwise the value of capital will be eroded by inflation in any event. How much risk to take will, however, depend on personal circumstances and risk appetite.
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