Equitable plan to punish defectors

Annuity holders retiring early face a heavy penalty for transferring their funds. Dennis Young and Clifford German investigate

EQUITABLE LIFE aims to impose an arbitrary 15 per cent penalty on with-profits retirement annuity and executive pension plan policy-holders who want to transfer their funds to another pension provider or buy an annuity from another source, even if the policy has matured.

A senior partner in an accountants' firm reached 60 with a number of Equitable Life with-profits policies valued at £318,000 last December and an estimated final value of £330,000. He wished to defer drawing his pension and reinvest in a self-invested pension elsewhere. Unless he takes all the benefits immediately, Equitable Life will demand nearly £50,000 for policies past their maturity date.

This is not an isolated case. Equitable Life says it is not a penalty but simply an approximation to the value of the assets that back the policy.

All insurance companies impose penalties on funds transferred to another provider some years before maturity, and on early surrenders, which are the same thing in the eyes of the insurance company. The amounts vary between companies and are discretionary, and are not covered by regulation. However, the trend, especially since the 1988 Financial Services Act, has been to reduce penalties and improve surrender terms.

A leading Scottish company in a similar case quoted a 5 per cent penalty for a transfer three months before maturity but eventually settled for 2 per cent.

Large arbitrary penalties imposed at or after maturity are therefore a potentially worrying development, especially as many more people may now need to reschedule pension provisions if they retire early or are made redundant before funds mature.

Anyone with a retirement annuity or executive pension plan policy who needs money before the age of 60 will have to transfer first to a personal pension, which allows retirement as early as 50.

Others will want to take advantage of the new flexibility introduced in the last Budget and defer taking an annuity if current rates are unattractive. They will then wait until rates improve.

There is no suggestion that Equitable Life intends penalising anyone wishing to draw benefits with immediate effect - whether in the form of annuity purchase or via self-invested pension arrangements - or to take out an annuity with Equitable Life itself. The company had one of the best records of allowing good surrender values for with-profits policies, and for paying realistic terminal bonuses.

Equitable Life and other established pension providers, however, now have many policy-holders near retirement and may be particularly vulnerable to increased mobility of funds. They would certainly not choose to see substantial sums transferred out of the Equitable piggy-bank. Bob Woods, a partner in Mattioli Woods, the Leicester pensions consultants, hopes to persuade the company to reverse its stand.

He says: "The position Equitable Life are taking creates an extremely dangerous precedent for the industry. They might well claim that with the benefit of their track record nobody would want to have their pension assets managed by anyone else. But such an arrogant attitude is hardly a reason for effectively depriving policy-holders of both choice and flexibility.

"It is imperative that people know that their insurers are not going to unduly penalise them in such situations."

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