Aviva, the country’s largest insurer, has reduced the exit penalties on its with-profits policies for the third time this year, but says it still too soon to remove the charges entirely.
The cuts, which came into effect this week, mean that around 1m holders of Aviva’s unitised with-profits bonds and pension policies will pay between one and three percentage points less to exit their plans early (see table).
The Market Value Reductions (MVRs), or exit penalties, applied on Aviva policies bought in 2000 have now dropped from 20 per cent to 18 per cent, while plans bought in 1991 and 2003 are free of MVRs.
Insurers apply MVRs on with-profits policies to deter customers from encashing the long-term investments during market downturns, when the funds are weaker.
When Aviva first imposed MVRs last year, nearly 40 per cent of its with-profits funds were invested in equities, mainly in the UK.
Aviva said its latest MVR revision followed stock market gains over the past six months. “The decision has been taken in line with Aviva’s commitment to prudent fund management and treating customers fairly,” said Aviva.
However, the insurer said the stock market was still well below its October 2007 peak and customers should only expect a gradual removal of the MVRs if the market rally was sustained.
Aviva’s move came a month after Friends Provident removed MVRs on all pension contracts taken out after 2001, and on all life contracts – affecting about 620,000 policyholders. MVR rates on all other contracts were reduced to an average of 2 per cent.
“It is good news that the life companies are starting to reduce MVRs, if not remove them entirely,” said Adrian Lowcock, senior investment adviser with Bestinvest, the independent financial advisers.
“However, if the past is anything to go by, then I would not expect the MVRs to be removed entirely and it will take years for them to disappear,” he added.
As with-profits fund values lag behind market movements, investors wishing to transfer their cash elsewhere should be alert to MVR-free points, typically at the 10th anniversary of bond policies or the selected retirement date for pension investors.
“If you are still a long way from a guarantee date, the decision to stay or go is more difficult,” said Laith Khalaf, pensions analyst with Hargreaves Lansdown.
“An MVR is a psychological barrier to transferring out as investors find it harder to cut their losses on an investment that has an explicit 10 per cent reduction in the form of an MVR as opposed to one where the price has simply fallen 10 per cent but, in fact, it comes to the same thing.”
Insurers typically write to customers two to three months in advance of an MVR-free date.
