Another round of poor bonus rates could prompt millions to cash in their traditional with-profits investments.
Should you stick with your with-profits investment? Photo: IAN WHADCOCK
By Teresa Hunter7:00AM GMT 26 Feb 2012
Article from the Telegraphs
Tens of millions of savers who are still clinging to a with-profits pension, endowment or bond have endured another wave of disappointing bonus payments – after a decade of falling returns.
With-profits policies were routinely used to save for retirement, pay off a home loan or build long-term savings, and 25 million policies remain in force. But while the salesmen who sold them collected generous commissions, and insurance companies still rake in handsome management fees, many policyholders have found themselves trapped in poorly performing plans that still have hefty exit penalties, in some cases swallowing almost a third of the plan's value.
Although returns have been dire on many of these policies, savers are urged to check the small print carefully before binning their investments. Some policies contain generous guarantees, which can effectively double your pension in retirement or ensure that your savings grow by, say, 4pc a year.
Insurers do not always flag up these benefits, so policyholders should read all documentation, talk to their provider and preferably consult an adviser before surrendering their policies.
Patrick Connolly of AWD Chase de Vere, the advisory firm, said: "With some policies it is a case of throwing good money after bad. But others are sitting on golden eggs, which could be very valuable should they hatch."
Last week Phoenix, now one of the largest with-profits companies, rose from the ashes to make its first ever with-profits bonus declaration.
This so-called "zombie" fund manager runs more than 6 million policies, having bought around 100 funds formerly run by the giants of the industry, such as Sun Alliance, Scottish Mutual and Pearl. These have been merged into 13 closed funds.
But while bonus rates have improved for some Phoenix investors, for others its announcement was little short of catastrophic.
Endowment savers with one of its brands, National Provident Institution (NPI), have earned an average return of just 2.9pc over the past 25 years. This assumes savers held their policy until maturity, so collecting the terminal bonus. Those who gave up earlier will have received even less.
This abysmal performance is all the more shocking given the bull market of the Nineties, which saw the FTSE 100 rise from about 1700 in 1987 to just under 6000 today, an annualised return that is closer to double digits.
Life Assurance of Scotland, Britannia Life, Crusader, Sun Alliance and London Life – all Phoenix brands – managed annual growth of 3pc over this period. Such disastrous results are not confined to Phoenix. One Aviva closed fund, sold by many building societies in the heyday of endowments, will pay an annual return of 3.4pc on policies maturing this year.
In many cases these payouts are now less than the mortgage debt it was designed to clear. Many customers will remember when maturing endowment policies not only paid off the home loan, but paid out a substantial tax-free surplus on top. And as recently as a decade ago, the average policy paid a return equivalent to about 13pc a year.
Laith Khalaf, of the advisers Hargreaves Lansdown, said: "These companies sold off the top performance league tables of the day, so to go on selling, they had to maintain big payouts.
"Unfortunately, this meant they were paying out more than they were earning. We know that up to 2001, some companies were paying out up to 24pc more than they earned. This money had to be clawed back at some point, so it's today's policyholders paying the price of this former exuberance."
But the news is not all unremittingly bad, even at Phoenix, where some of the brands are doing better than anticipated. Britannic, Royal, Scottish Mutual and Scottish Provident endowments have achieved annual growth over 25 years of about 5pc, in line with competitors elsewhere.
WITH-PROFITS BONDS
The news is hardly better on with-profit bonds, although here values are at least moving in the right direction. Anyone who invested £10,000 a decade ago will have a lump sum of just under £12,000 with NPI or Pearl. In most cases people can withdraw funds on this 10-year anniversary without paying exit penalties.
Scottish Mutual, also part of Phoenix, has done better: the same policy now worth £13,326. This compares with £12,424 at Scottish Widows.
At the Prudential, the same bond last year matured at £15,489, and investors will be looking for an improvement on that figure when the company announces its bonuses on Tuesday. Similarly, Liverpool Victoria (now known as LV=) will reveal next week whether the £15,315 paid out last year will be increased.
Mr Connolly said: "With bonds you have to differentiate between the strong funds, like the Pru and weaker companies. Many weaker funds still have penalties (known as market value reductions) on these bonds. Certainly millions are locked in funds paying no bonus, and which they cannot get out of because of the exit penalties."
WITH-PROFITS PENSIONS
When it comes to pensions, investors have to be particularly careful about overlooking valuable guarantees. Some offer guaranteed annuity rates of up to 12pc, which could effectively double your pension when you convert the fund to an income for life, given annuity rates are now less than 6pc for a 65 year-old man, and set to fall further.
Often it is the worst-performing funds that will have significant numbers of customers with these guarantees. When financial regulation changed, these guarantees had to be properly accounted for and backed by substantial capital. This left insurers insufficient room to pursue more adventurous investment strategies, which has constrained their growth, hence the poor annual bonus payments.
At Phoenix, annual returns on pension funds are as low as 3.5pc but some funds are achieving growth of around 5pc a year. This is not spectacular, given these are tax-efficient funds, but not necessarily out of kilter with the rest of the market.
In some cases Phoenix is even increasing payments. Those with Royal Life with-profits pensions policies saw their annual bonus increase from 0.2 to 1.5pc, while the bonus paid on Scottish Mutual's unitised with-profits pension increased from 1 to 3pc.
Britannia Life is the worst-performing pension: after 20 years of making monthly £200 contributions, investors will collect just £69,456. But its best, the former Life Assure of Scotland, will mature at £92,283. This compares with a £78,492 payout that many Standard Life pension customers will receive this year.
BEFORE SWITCHING, YOU NEED TO ASK THE FOLLOWING QUESTIONS
1. Do I have a guaranteed annuity?
Many old-style with-profits pension policies will have guaranteed annuity rates attached, which can be very valuable. This includes, among others, Eagle Star, Aegon, Scottish Life, Scottish Widows, Prudential, Friends Life, Zurich and Phoenix.
2. Is there a minimum annual growth rate attached?
On top of this, many traditional contracts provide a guarantee that your investment will grow by so much each year net of charges, typically 4pc. In current uncertain times, with bank and building society interest so paltry, this level of earnings can look attractive.
Companies offering minimum returns on some contracts include Zurich, Phoenix and Standard Life.
3. How is my fund performing?
Smaller funds are producing attractive returns, so it is important to investigate your fund's individual performance carefully.
Maturing 25-year endowments with Sheffield Mutual, Kingston Unity and Reliance Mutual last year achieved an annual growth rate of 11pc. Contracts at National Mutual and Wesleyan grew by an average 9pc each year, and LV and Foresters by around 8pc.
4. Are there any tax breaks?
Endowments and other with-profits life contracts are paid at maturity without any further capital or income tax liabilities. This can be attractive to higher-rate taxpayers with big capital gains elsewhere.
5. What are the penalties for cashing-in?
In the case of bonds, some firms, such as Royal London, LV, Scottish Widows, Legal & General, Friends and Phoenix, apply market value reducers (MVRs) if customers wish to cash in. The providers claim this is to protect investors who stay.
These MVRs are typically around 20pc, but can be higher or lower. One of the worst is 31.5pc on an old NPI pension plan.
However, many contracts allow for money to be withdrawn after either five years or on the 10th anniversary of taking out the investment.
Article from the Telegraphs
