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Distribution Bonds - Playing It Cool!

Distribution Bonds - Playing It Cool!

Category: Investments

Updated: 31/10/2008
First Published: 12/07/2006

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The latest survey by Investment, Life & Pensions Moneyfacts suggests that with the recent stock market volatility likely to persist throughout the summer, cautious investors seeking stability may find distribution bonds an attractive option.

The survey examined the latest distribution bond and with profits bond returns over various periods based on a single premium of £25K. It found that the performance of distribution bonds has, on average, continued to outpace the performance of with profits bonds over each of the terms surveyed (see table below).

Over a one-year period the average distribution bond surrender value has risen from £25,145 to £26,180 during the last 12 months, an increase of 4%. The three-year figures also reveal some healthy returns with the average surrender value of £32,059, up 7% on last year’s figure. However, it is over the longer term that distribution bond performance has been particularly impressive. Over five years the average return was £31,629 (26% growth), whilst the average 10-year value stood at £47,794 (91% growth). After ten years two providers had more than doubled the initial £25K investment – Legal & General with a return of £52,859 and AXA with a payout of £51,135.

Distribution bonds versus with profits bonds.

It is clear that distribution bonds have delivered some strong performance over the short, medium and long term, but how do they compare with the returns on offer from their with profits bond rivals?

Two years ago we revealed how distribution bond returns had surged ahead of the payouts on offer from with profits bonds over all the terms surveyed, even after ten years where with profits bonds had historically been dominant. This is still the case, with the gap between the performance of the two bonds actually widening over some terms. For instance, the difference between the average three year distribution bond payout and the average with profits bond has more than doubled from £687 to £1,577 over the last twelve months, whilst the average ten year difference has increased from £5,526 to £6,354.

Table 1: Average Distribution Bond and With Profits Bond Returns - £25K single premium as at 1 May 2006

PeriodDistribution Bond
With Profits Bond
1 year£26,180£25,375
2 years£28,719£27,702
3 years£32,059£30,482
4 years£30,519£29,279
5 years£31,629£28,610
10 years£47,794£41,440
(Survey assumes no income has been withdrawn for a male-aged 29 yrs 11 months at outset and is based on a £25K single premium.)

Richard Eagling, Editor of Investment, Life & Pensions Moneyfacts said: “Given that distribution bonds and with profit bonds contain a similar diverse asset mix, at first glance it may seem surprising that the performance gap has increased so markedly. However, whilst with profits payouts have been curtailed by market value reductions (MVRs) and the need to use investment gains to replenish heavily depleted reserves, distribution bonds have been able to pass on any investment growth immediately. In view of their diversified asset mix, low volatility and steady performance, it is not difficult to see why some experts are predicting that distribution bonds could soon become the number one choice for cautious investors.”

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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