What to do with your policy
You may have been thinking recently about what to do with your with-profits policy. Here we look at some things to help you decide. Maybe you've seen articles in the press about the performance of with-profits funds, or you've received a statement from your insurer which shows that your policy is not worth as much as you expected.
Remember that no single answer will be right for everyone and although some policyholders will be better off ending their policy early, others might do better to keep it until it matures. It is not an easy decision to make and before you do anything you need to think carefully about a range of issues.
- What sort of with-profits policy do you have
- Does the policy still meet your needs?
- The benefits or guarantees of your policy
- When does your policy end?
- How much money could you get if you keep your policy until it matures?
- Ending your policy early
- Can you cash in your policy without being charged a penalty?
- Transferring your policy to another insurer
- Switching to a unit-linked fund
- More information
There are various types of with-profits policies, so it is important to check what type of policy you have as they have different characteristics. The most common are whole of life, endowment, personal pension, annuity and bond.
Whichever type of policy you have, it may also include some life cover.
To help you decide whether the policy still meets your needs and expectations you need to think back to the reasons why you took out the policy. If your circumstances have changed, your policy may no longer meet your needs. Do you still need an income in retirement? Do you still need to the same amount of life cover? Has the mortgage already been paid off?
You should also consider whether the investment performance of the fund continues to meet your needs. In recent years some insurers have switched from investing in riskier assets such as shares, which tend to produce good returns in the long term, to investing in fixed interest assets such as gilts and bonds, which have lower, but more predictable returns. Investing in less risky assets protects you from short-term falls in the financial markets and helps your insurer to be able to meet any guarantees it has made to policyholders. But it means that you may get lower returns on your policy than you expected when you took it out. Ask a financial adviser how your fund performs and how it compares with others.
Most policies pay out a guaranteed amount at the end of the policy. This guarantee will be subject to the conditions set out in your policy documents, for example you may have to continue to pay all your premiums.
The insurer may also add bonuses to your policy to increase the amount of money you are guaranteed to get back at the end. The amount of bonus, and whether a bonus is added at all, generally depends on how well the investments in your fund have performed. But once any bonuses have been added they cannot be taken away, provided that you continue to meet the terms and conditions set out in your policy documents. Some policies guarantee that your annual bonus will never fall below a set level.
Some pension policies also have a guaranteed annuity rate. This means that when you retire the insurance company guarantees to pay your pension at a particular rate. Because interest rates are low and people are living longer, annuity rates have fallen; this means that when you retire your guaranteed annuity rate may be much higher than the rates available in the market.
Your guarantees may be very valuable. You should check your policy and make sure you understand what guarantees it includes and how much they might be worth.
It is important to know whether your policy ends on a particular date or whether it will continue until you choose to end it. Policies that end on a particular date are called fixed-term policies. If you have a fixed-term policy and you end it early, particularly in the first few years, you may get back a lot less than you paid in. This is because you may still have to pay for the costs to the insurer of setting up your policy. If your policy contains any guarantees they are likely to be more valuable the closer you are to the date your policy ends.
You can get an estimated maturity value for your policy by contacting your insurance company. But remember this is only an estimate and the actual amount will depend on the performance of the fund before your policy matures.
There are three ways to end your policy early:
- you could decide to stop paying into your policy, this is called making the policy paid-up;
- you could surrender or cash in your policy; or
- if you have a with-profits endowment you may be able to sell it on the second-hand market for endowment policies.
If you stop paying into your policy the amount of money you will get back when it matures will be less than you expected when you took out the policy. You should consider how much money you need (for example, to pay off your mortgage or provide an income in retirement) before making a decision.
If you cash in your policy early you may lose any guaranteed benefits. And if investment returns have been persistently poor, the insurer might need to apply a market value reduction or adjustment (MVR or MVA) to ensure you do not leave the fund with more than your fair share. Contact your insurer to find out exactly what your policy is worth if you cash-in on any given day. Tax rules prevent you cashing in a with-profits pension but it might be possible to transfer your fund to another insurance company – see Transferring your policy to another insurer, below.
If you have a with-profits endowment you may be able to sell it on the second-hand market for endowment policies. If you have paid into your policy for a long time (usually at least seven to ten years) you may be able to sell it for more than you would get if you surrendered the policy. To find out more about the secondhand market for endowments contact the Association of Policy Market Makers – see Related links.
Remember that whichever type of policy you have, it may also include some life cover. If you decide to end your policy you will lose that protection, so you should think carefully about any security you need to provide for your family. If you still need life cover find out how much it will cost to replace it; the cost of taking out life cover can go up as you get older, and if your health situation has changed a new insurance company may charge you more to replace your life cover.
If investment returns have been low in the recent past, the insurer might be applying a market value reduction or adjustment (MVR or MVA) to ensure that policyholders do not leave the fund with more than their fair share of its assets. Some with-profits policies allow you to cash in your policy early on certain dates without incurring an MVR. These are called spot guarantees or MVR-free dates and they usually apply five or ten years after the date you took the policy out. Whether these apply to your policy – and when they apply – varies between insurance companies. Check your policy documents to see if they apply to you.
Depending on what type of policy you have you may be able to transfer it to another insurer (annuity policies cannot be transferred). If the new insurer’s charges are lower, or if it invests more of your money in shares and property, you may be better off by transferring. If the new policy invests in different types of assets, you should consider the level of investment risk you are comfortable with. Also, you need to take into account the value of any guarantees you may lose and the costs you may be charged to transfer your policy and the possible cost of replacing any life cover lost by stopping your policy.
Your insurer may give you the option to switch out of its with-profits fund into its unit-linked fund. This may cost you less than if you cashed in your policy or transferred it to another insurer. But before switching you should consider whether you are comfortable taking on the risks associated with unit-linked funds; these funds do not smooth investment returns and so if the value of the investments fall, the value of your policy falls at the same rate. Different unit-linked funds invest in different types assets, so you should consider the level of investment risk you are comfortable with. You also need to take into account the value of any guarantees you might lose, the costs you might be charged to switch funds, and the possible cost of replacing any life cover lost by switching.
Look in your policy documents or your insurer's guide to with-profits. Your insurer should also be able to answer factual questions about your policy, but it may not be able to advise you what to do.
If you are unsure what to do you should speak to a financial adviser – see Getting financial advice.
