Why is it costing me to leave a with-profits pension?
I was sold a pension policy by one of the big insurers in the late 1990s which was half unit-linked, half with-profits. Since 1999 they have applied a so-called ‘MVR’ to the with-profits portion which means it will cost me 10-15% of the fund to move to a SIPP. How can this possibly be fair?
Tom Selby, AJ Bell Head of Retirement Policy says:
If you have a with-profits pension, your contributions will be invested with those of other members into a collective pot.
With-profits pensions will usually offer to pay annual and terminal bonuses – the former each year, the latter at the end of your policy term. These bonuses will be a percentage of the value of your fund. The aim is to smooth out investment performance, so you are less directly exposed to rises and falls in the value of their investments over the shorter term.
A unit-linked pension is one where the underlying fund is divided into units of equal value. The value, or price, of each unit will depend on the value of the assets in the fund.
The unit price determines the number of units you receive when you invest money in the fund, and the amount you receive when you sell your units.
A Market Value Reduction or ‘MVR’ is sometimes applied when a with-profits investor chooses to transfer their pot to a new provider before the end of their policy term. The purpose of an MVR is to ensure fairness across members.
For example, suppose there are three investors in a with-profits fund whose policies are worth £100,000, meaning the total value of the fund is £300,000.
If the fund dips in value by 10%, for example because of a market shock, and one investor chooses to take their policy without an MVR being applied, only £170,000 would be left between the two remaining investors (i.e £85,000 each).
In these circumstances, the provider may apply a 10% MVR on the transferring investor in order to ensure all members receive fair value (i.e. £90,000 each).
Unfortunately, this appears to be the situation you have found yourself in – and you are certainly not alone.
Lots of people who were sold with-profits policies in the 1990s have seen their investments perform poorly, meaning large MVRs can be applied to those transferring out.
While I sympathise with your view this feels unfair, the key question is whether or not the policy clearly set out that an MVR could apply in these circumstances.
If you feel this was not properly explained to you – or not properly spelled out in the scheme documentation – you can complain to your pension provider. If this complaint is rejected, you can go to the Financial Ombudsman Service for an independent adjudication.
You can find more information on how to make a complaint to the FOS here: How to complain.
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