A 62-year-old Independent reader, wife of a retired Scottish GP, has had a pension with Axa Equity & Law for the past 12 years. She asks: 'Should I withdraw the money I have built up or leave it in the fund to accumulate further?'
Bonuses are added each year to with-profits policies, and once added they cannot be removed. This means that a policy steadily builds in value, unlike a unit-linked one, which will rise and fall in relation to the stock market.
When the policy matures, or when the policyholder dies, an extra 'terminal' bonus is added. This might make up an much as 50 per cent of the total cash value. A cut in terminal bonuses could clearly be very damaging to the final pension payout.
Bonuses have been high for many years now, and as a result with-profits policies have produced some very good returns. With the best companies good returns are still being produced, even after the decrease in bonus rates.
A 10-year policy from Axa Equity & Law with a pounds 2,000 annual premium - similar to that of our Scottish policyholder - would have produced a pension fund of pounds 59,590 in 1991 compared with pounds 55,327 in 1992. The annual rates of return are 18.6 and 17.3 per cent respectively.
Those who have had a pension for a number of years are less affected by falling bonuses than shorter-term investors.
With returns like these, is there any need for investors to worry? Gillian Mainds, of the financial advisers Fiona Price, emphasises that people with with-profits policies should not panic, though she feels that 'perhaps the merits of with-profits have been overstated over the past few years'.
In the recent past, she says, insurance companies have artificially inflated with-profits growth by digging into reserves to pay higher bonuses. Returns have therefore been better than the market could actually provide, and companies are having to make bonus cuts to preserve their financial soundness.
The implications go further than two or three years' bonus cuts. In order to build up reserves again companies may have to increase fixed-interest exposure at the expense of equities.
If this happens while markets are recovering, the performance of with-profits policies will fall behind and bonuses could be at a lower level for quite a few years.
Though they will probably offer lower returns in the immediate future, with-profits pensions will still have the advantage that your accumulated fund cannot fall in value and will be useful as an option within your pension plan.
If you have deferred taking your pension and have a with-profits fund, should you move it? Depending on the terms and age of your policy, you will continue to receive a return on the fund until you finally start to draw your pension.
If you do not plan to take the pension for a few years, a drop in bonus rates is not a big enough worry to make you change your plans. Once you withdraw your pension you will be getting an income which you may not need at present and which is taxable.
Should younger investors move out of with-profits plans? You could consider adding some unit-linked exposure by changing the allocation of future contributions by putting contribution increases into a unit-linked fund, or by starting an additional policy which is unit-linked. It in best to choose one with a wide range of unit-linked funds on offer as well as a with-profits option.
On checking our Scottish reader's policy we found that it was unit-linked, and therefore not affected by with-profits bonus cuts - an easy mistake to make given the impenetrable nature of pensions literature.
But the policy is more vulnerable to the risk of market falls, so policyholders nearing or past retirement age might benefit from professional advice about switching to bond, gilt or deposit funds as a precaution.
If in doubt ask your insurance company or an adviser with specialist knowledge of pensions.
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