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Is your money in a ‘Zero Bonus’ Pension or Investment fund?

September 2012

by Nick Plumb – (Plumb Financial Services)

One of the most common enquiries we receive at Plumb Financial Services comes from investors who are worried about the performance of their With-Profits investments or pensions.  Once upon a time a With-Profits investment bond or a With-Profits pension was seen as a low risk home for your money that enabled you to benefit from growth in the stock market whilst smoothing out the ups and downs.

However, that is no longer the case and many UK With-Profits funds have performed very badly in recent years. 

Many insurance and pension companies slashed their annual bonus rates a few years ago when the markets failed to grow as well as they had previously. This rate cut was compounded by the recession of 2008. Unfortunately, despite a three-year period of growth in the stock market between mid 2008 and mid 2011, few companies have yet to increase their With-Profits bonus rates back up to anywhere near what they were before the recession.  In some cases, annual bonus rates have been set at zero for several years now. Terminal bonus rates (typically added to the accumulated fund at maturity) have also been slashed.

As a result of the poor bonus rates being paid, many investors looked to surrender and move their cash into other investments with better returns. To stop a run on cash exiting the funds, many pension and insurance companies applied Market Value Adjustments (MVAs), which are effectively an encashment penalty charged against investor’s funds. In some cases, these MVAs have been as high as 25% of the fund value, effectively trapping policyholders in an investment or pension fund earning zero bonuses.

Moving your money out of these funds and incurring such large reductions in the fund value would at first sight seem to be a reckless proposition.  However, in some cases by cutting your losses and getting out of these With-Profits investments and pensions sooner rather than later you could actually be better off in the longer-term than if you sit tight and hope for the best.

For people with under-performing With-Profits Bonds, there is a somewhat limited window of opportunity.  Until January 2013 it is possible to invest into an investment bond with another company that offers enhanced allocation rates for larger investments.  That means the new investment company will add money to your initial investment, which could replace what your existing investment company deduct as an MVA penalty. 

If your financial adviser is also willing to work for a fee, then some or all of the commission that would ordinarily be payable to him or her by the investment company could be given up and rebated into the plan to further enhance the allocation rate of the new investment.  That means you could get back the MVA penalty deducted on exit from the under-performing With-Profits fund.

This will only work until the end of this year, as after 31st December, 2012 investments that generate commission will disappear and all Independent Financial Advisers will have to work on a fee charging basis.  However, many IFAs (like ourselves) are already working on a fee charging basis, so whilst these commission paying investments are still around, they could offer a way out of the With-Profits nightmare.

If you have been saving for retirement into a traditional With Profits Personal Pension plan, it may also be worth considering a transfer of your fund into a stakeholder pension or a stakeholder friendly personal pension.  The fund management charges you pay will be lower, and the potential for a better return on your money by the time you retire will be greater.  Ask an independent financial adviser to carry out a pension transfer analysis for you.  You might get a pleasant surprise and find that you do not have to sit tight in a pension that is earning you no annual bonus.

If you have a With-Profits Investment Bond or Personal Pension, it may be worth checking your statements for the last few years to see what bonus rate you have been getting. Although moving your money out of With-Profits plans may not work for all investors, it is worth checking out your options. You should be aware that any enhanced allocation rates will inevitably be recovered from charges made within the new contract, usually over the first five years of that contract.

If you have any concerns, Plumb Financial Services offer a free With-Profits checking service, where we will check the bonus rates you have been receiving on your investment or pension policy.  If your fund pays a poor bonus rate, we can then examine whether there is a way of moving you out of that fund that is both economical and financially viable for you.

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