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With profits policy

It’s a way of saving regularly or investing a lump sum using a pension or life insurance policy. Policyholders money is paid into a 'pooled' investment fund along with other savers and invested in a mixture of shares, fixed interest securities, such as loans to the government or large corporations and cash deposits over an agreed period. The fund is linked to the stockmarket and designed to provide a minimum guaranteed return. The ups and downs of directly investing in shares are evened out by using a technique known as ‘smoothing’.

Once all the costs of running the fund have been deducted, the money left over, i.e. the profit, is distributed to the fund’s policyholders in the form of an ‘Annual Bonus’ and for some policies, a ‘Terminal Bonus’ is added at maturity or, if a pension, on your selected retirement date. The amount of profit generally depends on how well the investment fund performs over the term of the policy.

There are two types of With Profits policy, ‘traditional’ and ‘unitised’, and each works in a different way.