Friends Provident and Norwich Union have both introduced exit penalties, known as Market Value Reductions, on their with-profits policies.
Market Value Reductions (MVRs), usually applied only when stock markets have been falling, penalise 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 bonuses if you cash it in early.
Norwich Union has will apply a MVR of between 13% and 22% to unitised with-profits policies, depending on which year the policy was taken out. The MVR applies to partial or total withdrawals from CGNU, NULAP and CULAC funds.
‘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 MVR…’, said John Lister, chief actuary at Norwich Union.
Friends Provident has 1.3 million with-profits policies in force. It says its MVR will apply to around 250,000 policies and that 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.
Dominic Lindley, Which? personal finance campaigner said, ‘these penalties will come as a bitter blow to with-profits policyholders. There is no transparency about how they are calculated and many policyholders will not trust the company to apply them fairly. This could penalise those Norwich Union policyholders who had stuck with fund because of the promise of payouts from the reattribution and special bonuses. Anyone thinking of cashing in their policy should immediately contact their provider to find out when they would next be able to cash-in their policy without being subject to an MVR and consult an independent financial adviser’.
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.