INVESTORS looking for low-risk alternatives to equities - particularly those who anticipate future capital needs in Britain - might consider with-profits bonds or second-hand endowment policies, financial advisers say. These products can provide a secure way to earn long-term returns. By buying a series of with-profits bonds or second-hand with-profits endowment policies that are scheduled to mature over a number of years, an investor can provide for upcoming expenses such as school fees or retirement income. Be warned, however: with-profits products are complicated and should be bought only by people who understand them and are willing to commit funds for long periods. With-profits bonds are now offering returns of 8 to 10 per cent but can pay as much as 14 per cent. 'They keep it as high as possible to attract business,' William Tatham, Hong Kong-based director of Britain's Towry Law International, said of the insurers who offer these products. An individual who invests in a with-profits bond can pay either a lump sum, known as a single premium, or instalments. Most of the money is pooled with other people's in a fund invested in cash, equities, fixed-income securities and property. The premium payments go to secure a modest but guaranteed payment, the sum assured, upon the bond's maturity. Regulations require companies offering with-profits bonds to set aside large cash reserves to cover these commitments. Meanwhile, profits on the fund's underlying investments are distributed in the form of annual bonuses and a final bonus. The concept is to smooth investment returns by holding back some returns during good years to boost them during lean years. Originally, most profits were distributed through the annual bonuses, also known as reversionary bonuses, which are guaranteed once they have been allocated. Later, however, a final bonus, also known as a terminal bonus, was added. This is discretionary and reflects long-term appreciation not passed on in annual bonuses. Nowadays, the final bonus can account for more than 30 per cent of a bond's total payout. Mr Tatham said many funds had long, healthy track records. 'If you work out what the fund has made over the previous five years and average it out, you will know what you're getting into,' he said. This approach assumes previous annual bonuses were suitably balanced, which has not always been the case. In 1993, for example, one of Britain's top actuarial firms called for a five-year moratorium on with-profits pension plans. Bacon & Woodrow claimed that unrealistically high bonus payouts from the mid-1980s to 1992 - when markets were on a bull run and insurers faced strong competitive pressures - had caused the underlying funds to become dangerously unbalanced. So potential investors will want to check whether past annual bonuses appear sustainable and consistent with market returns. Generally, a person should consider buying a with-profits bond only if he intends to hold it to maturity, because most of the payout comes at the end of the term and most set-up fees - which can run as high as 7 per cent of paid-in capital - are paid during the early years. Investors who try to cash out ahead of time risk early-surrender penalties during the first five years and a market-value adjustment, or MVA, at any time during the bonds' life. The MVA gives the insurer a free hand to penalise investors who withdraw monies when investment conditions are poor. Second-hand endowment policies are another option for those looking for a low-risk product. Annual returns on traded with-profits endowments are running at about 10 per cent, and the terminal bonus can account for as much as 60 per cent of the total payout. Endowments are insurance-based savings products that Britons often buy to finance home loans. Ideally, the endowment provides a higher return than the interest on the mortgage, and its terminal bonus is enough to pay off the home loan's principal. Inevitably, however, some people sell their houses or have other reasons for wanting to get out of their endowments early. They can avoid punishing early-surrender penalties by selling their policy - usually to an endowment broker, who then sells the policy to an investor. Policyholders can usually expect to receive 10 per cent to 20 per cent more than the insurer would offer as surrender value. The investor who buys the endowment must keep up the premium payments but avoids the policy's high set-up costs and faces a much shorter wait to maturity. Instead of 25 years, there might be just five or 10 years left to run. However, it can be difficult to gauge an endowment's proper value. Last summer, Britain's Institute of Actuaries said many second-hand endowments appeared overpriced, possibly by as much as 20 per cent. Pricing is based on a certain amount of guesswork about general investment returns and future bonus payouts. Most brokers project recent bonus rates into the future. But actuaries argue that bonuses will fall over the next few years. Jacqueline Ho, a partner at independent financial adviser Tresidder Tuohy, said endowment brokers could not predict the future. 'What they do know is what history has shown,' she said.