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?
SPONSORED FEATURES
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 Executive / Foreign Exchange Dealer - OTE £40,000+

    £16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    Day In a Page

    The long walk west: they fled war in Syria, only to get held up in Hungary – now hundreds of refugees have set off on foot for Austria

    They fled war in Syria...

    ...only to get stuck and sidetracked in Hungary
    From The Prisoner to Mad Men, elaborate title sequences are one of the keys to a great TV series

    Title sequences: From The Prisoner to Mad Men

    Elaborate title sequences are one of the keys to a great TV series. But why does the art form have such a chequered history?
    Giorgio Armani Beauty's fabric-inspired foundations: Get back to basics this autumn

    Giorgio Armani Beauty's foundations

    Sumptuous fabrics meet luscious cosmetics for this elegant look
    From stowaways to Operation Stack: Life in a transcontinental lorry cab

    Life from the inside of a trucker's cab

    From stowaways to Operation Stack, it's a challenging time to be a trucker heading to and from the Continent
    Kelis interview: The songwriter and sauce-maker on cooking for Pharrell and crying over potatoes

    Kelis interview

    The singer and sauce-maker on cooking for Pharrell
    Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

    Cameron lowered the flag for the dead king of Saudi Arabia...

    But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Humanity must be at the heart of politics, says Jeremy Corbyn
    Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

    Joe Biden's 'tease tour'

    Could the US Vice-President be testing the water for a presidential run?
    Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

    Britain's 24-hour culture

    With the 'leisured society' a distant dream we're working longer and less regular hours than ever
    Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

    The addictive nature of Diplomacy

    Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
    Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

    Fashion: Ooh, Lady Chatterley!

    Take inspiration from DH Lawrence's racy tome with equally racy underwear
    8 best children's clocks

    Tick-tock: 8 best children's clocks

    Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
    Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

    Charlie Austin: ‘If the move is not right, I’m not going’

    After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea