Outflow forces Pru to raise exit penalties

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The Independent Online

Prudential has widened the net of with-profits policyholders caught by an exit penalty if they cash their policy in early to protect the fund from bolting investors and continued poor stock market levels.

Prudential has widened the net of with-profits policyholders caught by an exit penalty if they cash their policy in early to protect the fund from bolting investors and continued poor stock market levels.

The company says it has experienced a higher number of customers wishing to withdraw their money early from the fund over the past few weeks, which, combined with the continuing stock market malaise, meant action had to be taken to protect policyholders investing for the long term. Before yesterday's announcement, an MVA (market value adjuster) would apply only to customers who wanted to cash in a pot of more than £25,000 from the with-profits fund in one year.

This threshold has now been abandoned and anyone who has been investing for less than five years will be subject to an MVA of about 3 per cent. Anyone who has been investing for more than five years can remove only £10,000 in one year without having an MVA applied. The size of the MVA is decided on a case-by-case basis.

The company shifted a substantial part of its £80bn with-profits fund portfolio out of equities into bonds at the end of 1999. As a result, Pru has not seen the depletion in reserves experienced by other insurers who have stuck with the stock market. But the tactical switch to reduce equity content to about 50 per cent of the fund has not cushioned policyholders from stock market falls completely.

Investors had their final payouts cut by between 5 and 10 per cent last month. At the time Pru said no change in its policy of applying exit penalties – or MVAs – was needed.

Other insurers are expected to make further bonus cuts and MVA increases. Financial advisers trying to help clients who are unsure of what to do with their investment are disappointed that Pru has drip-fed the bad news after announcing bonus cuts only two months ago.

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