An estimated 25 million people have a with-profits policy worth £400 billion, but people with new money to invest should avoid these funds as they are complex and confusing, says a new report from Which? Money.
Millions of people have with-profits policies for their pension, savings or mortgage endowment. But two thirds of Which? members (66%) with these policies surveyed by Which? Money said they would not consider investing in a with-profits policy in the future and 44% said they were dissatisfied with their investment.
As well as policies performing badly, people are being trapped by high exit and transfer penalties and their policies have been hit by providers cutting their bonus rates. The lack of transparency means people don’t know what bonuses they’ll receive, and can be unsure whether an exit penalty will apply when they cash their policy in. There is no guarantee that the provider will run the fund in the best interests of policy holders.
Big names such as Legal & General, Prudential, Norwich Union and Scottish Widows all recently reintroduced or increased penalties for people ending their policies early, while Norwich Union reduced its final bonus rates by as much as 10%.
Advice if you have a policy
Which? Money offers the following advice to consumers with with-profits policies:
1. Check your documents to make sure whether the policy is with-profits – an annual statement with a ‘bonus rate’ means that it is.
2. Consider if you need your policy, and if so, whether you can replace it with an alternative option.
3. Check whether you will suffer from any penalties if you stop the policy, and if there are any penalty-free days.
4. Look for any guarantees you could lose and consider whether you should sacrifice part of your terminal bonus by leaving.
5. Check whether there is any payout due from the fund’s ‘inherited estate’.
6. Get advice from an IFA – find one at www.unbiased.co.uk.
Which? Money says
Martyn Hocking, editor of Which? Money, says:
“There are lots of reasons to be wary of with-profits policies: they are too complex and confusing to be a good investment and the firm retains too much discretion over whether to pay bonuses and impose exit penalties. Some companies still sell these policies, but if your financial adviser recommends that you invest your money into one of these funds, alarm bells should ring!
“For those people with some new money to invest there are plenty of alternatives to with-profits policies. Consider a Best Buy savings account or Isa, or for those prepared to take on some risk, you can invest in the stock market. If you are worried about an existing with-profits investment, seek advice from a recommended IFA.”
For more information on with-profits policies look here.
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