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With-profits investors can exit penalty-free

Bond holders urged to check MVR-free exit dates

money box in chains

Research by the investment company Skandia suggests that 500,000 with-profits bond holders should enjoy a MVR-free ‘window’ in 2011, as they reach the 10th anniversary of their initial investment. It has identified 23 firms with products in this category.

Poor performance

With-profits bonds were a popular investment in the late 1990s and early 2000s, with almost 500,000 policies sold in 2001 alone. They were seen as a low-risk way of sharing in stock market growth, offering capital guarantees and protection from poor performance by virtue of ‘smoothing’ – holding back profits from good years to balance out losses from poor ones. 

Unfortunately, the promise of with-profit bonds has rarely been matched by their performance. In 2010, the average bonus rate was only 1%, less than the return savers could have earned in an average cash Isa.    

With-profits prisoners

Given the poor performance of with-profits bonds, many investors have been tempted to cut their losses and move their money elsewhere. To do this before the investment matures means that you get a lower terminal bonus, however, which can be a large part of the expected long-term growth. 

More controversially, many with-profits operators impose a penalty charge if you withdraw funds early. This is known as a market value reduction (MVR). In some cases this can be prohibitive.The rate charged can be as high as 20% or more, depending on the firm.

Ten year with-profits release   

After 10 years, some with-profits providers provide an opportunity for investors to move their money without a market value reduction. The penalty-free ‘window’ can be pretty restricted however, and investors need to plan ahead if they intend to move. 

Firms identified by Skandia as having with-profit funds with MVR free days include: Aviva, Clerical Medical, Co-operative Insurance Society, Homeowners Friendly Society, Liverpool Victoria Friendly Society, Marine and General Mutual Life Assurance Society, National Provident Life, NFU, Pearl Assurance, Phoenix & London Assurance Company, Phoenix Life, PLAL, Police Mutual Assurance Society, Scottish Equitable, Scottish Friendly Society, Scottish Mutual, Scottish Widows, SPI, Sun Life, Teachers Provident, Wesleyan Assurance Society, Winterthur Life, and Zurich Assurance. 

Which? personal finance campaigner Dominic Lindley says: ‘If you have a with-profits policy, check with your insurance company as to whether it is currently levying a Market Value Reduction and whether you are approaching any window which would allow you to transfer this money without penalty. With-profits products can be complex, so you should consider taking independent financial advice.’

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