Exit penalties are set to remain in place on with-profits policies, in spite of rallying equity markets.
However, the financial hit that policyholders take if they encash their plans before maturity could be less severe after two insurers lowered their market value reductions, or MVRs.
MVRs are designed to deter policyholders from early encashment as this dilutes the investment pot for remaining policyholders. MVRs were removed from many policies in early 2007, but returned in late 2008 as stock market falls gathered pace. Exit penalties as high as 20 per cent were applied on some policies.
On Monday, Friends Provident eased its MVR from 15 per cent to 13 per cent, to reflect a “modest” 1.75 per cent return on its main with-profits fund over the past six months.
This is the upper limit of the penalties that can be applied. Friends said the average exit penalty on about 240,000 regular premium pensions and life policies would be 4 per cent, down from 5 per cent.
Friends’ move came less than a month after Aviva, one of the UK’s largest insurers with 2.3m with-profits customers, eased exit penalties on its unitised with-profits plans.
From July 1, the average MVR was reduced from 11 per cent to 10 per cent, the second such reduction by Aviva this year.
But in spite of the recent trickle of rate reductions, financial advisers say it would be premature to predict the total removal of MVRs.
“With-profits funds have to wait for a combination of improvements to stock markets, fixed interest and property before that happens,” said Danny Cox, chartered financial planner with Hargreaves Financial Practitioners.
“The FTSE 100 is still about 2,000 points from the high in October 2007. I hope that, as markets improve, MVRs will reduce.”
The easing of MVRs was offset, however, by insurers taking a less generous approach to the payment of final bonuses to hundreds of thousands of policyholders whose plans are maturing this year.
Insurers do not guarantee to pay final bonuses, but policyholders rely on the payments to boost their investments. Returns in the good years are often held back to distribute in poorer markets – a process known as smoothing.
Phoenix Life this week announced that rates had “fallen slightly” for policyholders with maturing plans. This was to reflect the fact that “policies maturing now have not had as much exposure to some of the high returns earned in the 1970s, 1980s and the early 1990s as some of our older policies did,” said the group.
Aviva also reduced its terminal bonus by about 7.5 percentage points for the estimated 50,000-100,000 Aviva mortgage endowment holders whose policies are due to mature this year. This came as the value of the main funds fell 3.5 per cent in the six months to the end of June.
Regular bonus rates have been held on all conventional policies and Aviva Life & Pensions UK and CU unitised policies.
Insurers said the bonuses can be baffling for policyholders
trying to determine their strategy.
“This really highlights the transparency problem with with-profits plans,” said Adrian Lowcock, senior investment adviser with Bestinvest, the financial adviser. “The smoothing principle is applied differently by each insurer. It isn’t easy to calculate whether you should stay or get out.”
Investors who were thinking about cashing in their plans should ask their insurer about MVR-free periods, typically at the 10th anniversary of the plan.
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