Simon Read: Time to put an end to these outrageous 'exit penalties'

There are more than 25 million with-profit endowment policies in force across the country which means there are a lot of people stuck with potentially poorly performing investments. New proposals from the City watchdog may help to make it easier for people to escape from the worst performers.

With-profits policies were once sold in their millions to back mortgages as well as being used as part of pension planning and bonds. The theory behind them is simple: they hold back annual bonuses in good years to pay bonuses when markets do not perform well. By doing so they smooth out investment returns to give savers less of a rough ride than they would experience with direct investment in the stock market. As such they seemed ideal for long-term financial planning such as paying off a mortgage loan in 25 years' time.

But, as many borrowers discovered to their anger, when markets struggled – as happened a decade or so ago – policies couldn't guarantee to grow enough to cover the whole mortgage debt. It left many facing a shortfall and having to make other arrangements to pay off their loan. As a result very few with-profits policies are now sold to repay mortgages, although they are still used as straightforward savings or pension investments.

With policies lasting a minimum of 10 years and up to 25 or more, it can be easy for investors to become locked into a fund that is no longer fit for its original purpose. But with-profits providers have made it all but impossible for people to leave by imposing unfair market value reductions on policies.

The principle behind a MVR is that it should stop someone leaving with more than their share of the underlying fund. That is fair enough, because allowing investors to withdraw with more would mean hitting the remaining investors. But the reductions have become hugely controversial with critics suggesting with-profits firms have been using them as exit penalties.

The Financial Services Authority agrees and is proposing to force with-profit firms to distribute surpluses to investors more fairly and stop them using MVRs as exit charges. The watchdog also plans to strengthen rules requiring with-profits firms to obtain independent advice on the management of their funds.

The moves – planned to be introduced this autumn after a consultation period – should ensure a better deal for policyholders. They won't lead to better returns, however, which means investors still need to examine their policies, especially those in closed with-profits funds. "These are often run to manage liabilities rather than provide reasonable returns," points out Patrick Connolly of advisers AWD Chase de Vere. "If MVRs in poor performing or closed with-profit funds are reduced then more policyholders will undoubtedly exit their with-profits policies," he says.

I'm often critical of the FSA for its slow progress or late action, but it does seem to have got its act together on the with-profit problem. Even though we'll have to wait until autumn for these new proposals to be adopted, they are a positive move. It's also right for the regulator to have a consultation period to give consumers and the industry the chance to express their opinions before changes are made.

In the meantime with-profits policyholders should review their investment and be ready to make a move when it becomes financially more easy.

s.read@independent.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Assistant / Buyer

    £15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

    Recruitment Genius: Customer Service Advisor

    £15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    Day In a Page

    Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

    Is this the future of flying?

    Battery-powered planes made of plastic, and without flight decks
    Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

    Isis are barbarians

    but the Caliphate is an ancient Muslim ideal
    The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

    Curse of Brink's Mat strikes again

    Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
    Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

    'The ministers talk to us about miracles'

    Why Greeks are cynical ahead of the bailout referendum
    Call of the wild: How science is learning to decode the way animals communicate

    Call of the wild

    How science is learning to decode the way animals communicate
    Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

    'The economic collapse has happened. What is at risk now is democracy...'

    If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
    The science of swearing: What lies behind the use of four-letter words?

    The science of swearing

    What lies behind the use of four-letter words?
    The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

    The Real Stories of Migrant Britain

    Clive fled from Zimbabwe - now it won’t have him back
    Africa on the menu: Three foodie friends want to popularise dishes from the continent

    Africa on the menu

    Three foodie friends want to popularise dishes from the hot new continent
    Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

    Who will fill Donna Karan's boots?

    The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
    10 best statement lightbulbs

    10 best statement lightbulbs

    Dare to bare with some out-of-the-ordinary illumination
    Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

    Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

    Briton pumped up for dream meeting with world No 1
    Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

    Nick Bollettieri's Wimbledon Files

    It's time for big John Isner to produce the goods to go with his thumping serve
    Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

    Dustin Brown

    Who is the German player that knocked Nadal out of Wimbeldon 2015?
    Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

    Damien Martyn: 'England are fired up again, just like in 2005...'

    Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test