Falls in the stock market lead to the re-introduction of market value reductions by big life companies.
Friends Provident and Norwich Union have both introduced market value reductions (MVRs) on their with-profits policies with effect from 21st October 2008.
What are Market Value Reductions?
An MVR, usually applied only when stock markets have been falling, penalises you if you cash your policy in early.
If you have a with-profits policy your return is in the form of reversionary bonuses (paid each year) and a terminal bonus (paid when the policy matures). Once added the reversionary bonuses cannot normally be taken away. But the application of a MVR changes this as it allows the insurer to claw back some of the reversionary bonuses if you cash it in early. You also usually miss out on the terminal bonus.
‘Since the beginning of the year we have seen equity markets, commercial property and corporate bonds fall significantly in value. As a result we have reviewed the situation and decided to introduce MVRs…’, said John Lister, chief actuary at Norwich Union.
Norwich Union has said that a MVR of between 13% and 22% will be applied to unitised with-profits policies, depending on which year the policy was taken out. For example, units purchased in 1992 will be hit with an average MVR of 22%, but an MVR of 13% will apply to units purchased in 2001 and 2008. The MVR applies to partial or total withdrawals from CGNU, NULAP and CULAC funds.
Friends Provident has 1.3million with-profit policies in force. It says its MVR will apply to around 250,000 policies and these are mainly pension policies. The MVR will range from 5% to 14%. The main policy years affected are 1999 and 2000 although for some older policies where there is a guaranteed bonus rate of 4%, MVRs are applicable for most years of entry.
‘We will continue to monitor the level and appropriateness of MVRs’, a Friends Provident spokesperson said.
Martyn Hocking, editor of Which? Money said, ‘be very careful if you have a with-profits policy and are thinking of cashing it in. Seeking independent financial advice about such a move is always important but is even more so now that we are seeing the re-introduction of MVRs’.
For more information on with-profits policies and how they work read our with-profits article. You may also be interested in our article on finding a financial adviser.