WHEN the world’s financial markets crumpled last year, many small investors might have felt safe in the knowledge they had money salted away in with-profits policies held at big insurance companies.

These supposedly “bombproof”

investments are designed to smooth returns over the years to guard savers against wild upheavals in stock markets such as we have seen recent months.

They are sold to investors with a life policy, which pays a lump sum if holders die while holding the bond.

All told, there’s £400bn sitting in an estimated ten million with-profits bonds in Britain, with providers of the stature of Prudential, Standard Life, Friends Provident and Legal and General. The money is invested in shares, fixed interest and property portfolios, with annual bonuses added to the account and paid out when the policy matures.

Annual bonuses, and the final payout, are decided by actuaries at the insurance companies, according to profits earned or losses sustained during the year.

Not long ago, with-profits bonds promised a pretty good return. At the end of the Nineties, many investors saw interest rates were falling, and with providers such as Scottish Mutual offering a ten per cent bonus at the end of year one, bonds looked a good place to put money for the longer term.

With bad timing, I bought several profits bonds at that time to provide safe and steady growth up in the years up to my retirement, with a payout to pay off the mortgage if I pegged out in the meantime.

None of the policies has done much over nine years, but the best by some distance has been the Mutual Investment Bond with Liverpool Victoria, which slowly turned £5,000 in 2000 into £6,684 by June 2008.

Could it survive apocalypse 2008? In May, I read the latest Liverpool Victoria report on its fund with some foreboding to find the value of its shares was down 28.3 per cent and property holdings by 21.8 per cent, while fixed interest showed a 7.2 per cent rise.

In a year, the value of my bond has fallen back nearly £200 to £6,499. But if I want the money back tomorrow, the cash-in value has plunged far below that figure to £5,463 – thanks to the application of a swingeing Market Value Reduction to stop me and many others from making any such request.

That would mean that in nearly a decade, my £5,000 would have earned only £463 profit. I could have beaten that in a building society account, with instant access at all times.

The death benefit remains at £6,499, but it seems rather drastic to have to die to recoup money that was sitting happily in my bond this time last year. All this, I am afraid, rather confirms the warning signs flagged over with-profits policies with increasing regularity by leading financial advisor Hargreaves Lansdown.

Danny Cox, from the company, said: “Despite what they promise, with-profits policies have not worked very well in the volatile market of the last ten years, which is bad because that was largely what they were designed for.

“Apart from one or two providers – like Prudential and Wesleyan – most products in this sector have been poor performers.”