With Profits

We are reviewing the advice given in relation to with profits:

I still think a with profits has a place to play in investments and it is a low risk method for you to invest in the markets.

Our advice on the above:

Complete twaddle in my view. I have long been of the view that with profits are the equivalent of your parents giving you spending money for your summer holidays but drip feeding it to you over the summer and of course giving you less back than you thought you had. It is an ill thought out concept that fell over at the first time of asking. Be careful before exiting such a plan though. The case of whether or not you should exit a with profits investment or pension revolves around what weight you put on potential pain and potential gain.

The obvious potential pain of leaving a with profits plan is the market value reduction that will apply if you encash as well as any potential penalties. There are other little hidden aspects to this to consider guarantees: guaranteed annuity rates, guaranteed bonus levels and standard bonuses. Lets look at some of these painful aspects:

You should check any MVR (market value reduction – just a nice sounding word for a hefty penalty) that is being applied. It has been known that providers do not have the right to levy the MVR at all. Some insurance companies are finding it difficult to keep track of their legacy contracts so be sure they have the right to hit you with that MVR axe by assessing the policy documentation. Some companies provide an MVR guarantee at a specific date. Norwich union for instance provide this at normal retirement date of the policy or at 10 years for the investment bond. If you don’t use the MVR free option at normal retirement date you will have lost this until age 75 and cannot encash MVR free until then – financial suicide. In any event, I personally believe MVRs are there to keep people in the investment and don’t really represent the true state of the investment. If the MVR was true why has it not come own anywhere near the dramatic rises in the market over the last 3 years.

Worldwide’s score: 3 out of 10

Tags: investing, with profits

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