From Adviser Guide: With-Profits
How and when to exit with-profits funds
There are no hard and fast rules and a number of factors need to be considered before deciding whether to exit a with-profits investment.
If a client is considering cashing in a with-profits policy, there are a number of things to consider, not only how the client feels about giving up their potential bonus if they hold until maturity.
Paul Fidell, senior investment business development manager at Prudential, says advisers should ask the following questions:
• Has the client’s attitude to risk changed?
• Is the risk profile of the product still relevant?
• Does the asset mix of the fund still meet the policyholders investment goals?
• How has the fund performed, how is it likely to perform in future?
• Is there a built-in guarantee or a sum assured, and will they be lost if the client exits?
• Will there be any additional charges on exit that could be avoided if the client remained in the fund or exited at a future date?
• Does the investor need the money to meet another investment or personal requirement?
Mr Fidell insists there are no hard and fast rules and that a balance between these questions and other factors needs to be considered before deciding whether it is in a client’s interest to exit their with-profits investment.
“This decision ultimately lies with the client – although many will seek advice first – and they can instruct their provider at any time.
“The exception is a with-profits annuity which cannot be cancelled and runs until the death of the policyholder although some providers may allow conversion to a non-profits annuity.”
As for the guarantees, which in some funds can include generous annuity rates, it is essential to establish what exactly will be given up by exiting early, stresses Kevin Arnott, with profits actuary at the Phoenix Group, says.
With interest rates currently at historically low levels, guarantees issued in the past may now be very valuable.
“One way of gauging the value of the guarantees is to calculate the return that would have to be earned on the surrender value to enable it to grow to meet the guaranteed benefit at the maturity date,” he says.
“The guaranteed return from maintaining the policy may be higher than could be obtained elsewhere. Also if it’s a pension policy – check if there are any guaranteed annuity rates available at maturity as many older pension contracts have an attractive guaranteed rate which far outstrips what’s available on the open market.
“It’s also important to remember any tax implications.”
Clients’ options for exiting with-profits include surrender – preferably using one of the windows where market value reductions (MVRs) are not applied, waiting until the policy reaches maturity, or to leave paid up – where no further premiums are paid but the policy stays invested, although with correspondingly reduced guaranteed benefits.