Avoid with-profits warns Which?

Investors are being urged to avoid with-profits policies - with Which? lambasting them for being "complex and confusing".

Some 25 million people hold with-profits polices worth £400 billion - largely for pensions, savings or mortgage endowments.

However, Which? Money is urging investors to steer clear of the products.

Martyn Hocking, editor of Which? Money, said: "There are lots of reasons to be wary of with-profits policies: they are too complex and confusing to be a good investment and the firm retains too much discretion over whether to pay bonuses and impose exit penalties.

"Some companies still sell these policies, but if your financial adviser recommends that you invest your money into one of these funds, alarm bells should ring!"

Legal & General, Prudential, Norwich Union and Scottish Widows all recently reintroduced or increased penalties for people ending their policies early, while Norwich Union reduced its final bonus rates by as much as ten per cent.

Norwich Union has defended the policies.

"We think with-profits is still a viable product," a Norwich Union spokesperson.

"We believe in the product and it is good as a part of a diversified product.

"They have performed well in the past and we think it will do so in the future."

Norwich Union also claimed it was unfair to compare with-profits policies in the current environment and they still outperform cash.

Which? Money with-profits checklist

• 1. Check your documents to make sure whether the policy is with-profits - an annual statement with a 'bonus rate' means that it is.
• 2. Consider if you need your policy, and if so, whether you can replace it with an alternative option.
• 3. Check whether you will suffer from any penalties if you stop the policy, and if there are any penalty-free days.
• 4. Look for any guarantees you could lose and consider whether you should sacrifice part of your terminal bonus by leaving.
• 5. Check whether there is any payout due from the fund's 'inherited estate'.
• 6. Get advice from an IFA - find one at www.unbiased.co.uk

"For those people with some new money to invest there are plenty of alternatives to with-profits policies," said Mr Hocking.

"Consider a Best Buy savings account or Isa, or for those prepared to take on some risk, you can invest in the stock market. If you are worried about an existing with-profits investment, seek advice from a recommended IFA."