No bonus for three years

leonotis

In 1984 I started a Norwich Union With Profits Retirement Annuity Section 226. For the last three years now, it hasn't earnt any bonus and I'm wondering whether to carry on paying the premiums until the end (another 5 years), or whether to make it paid up and put the premiums into something else such as a cash ISA.
The last three bonus statements have also prominently displayed the following sentence - "A final bonus is not guaranteed".
Any views or opinions would be welcome.

dunstonh

A lot of NU RACs have guaranteed annuity rates and that is where the real value lies. This is probably why they have reduced the bonus down to nothing.

leonotis

You are correct dunstonh, it does have guaranteed annuity rates. However, it is the value of the pension fund that will determine the actual payout at the end. I suppose I'm trying to get a feel for which might be the best way to go. I am wondering whether continuing to pay the premiums at this stage will actually make any difference or not to the final fund value.

EdInvestor

Hi leonotis

What rate is the GAR and how big is the fund now?

Most people who have funds with decent sized GARs are dead keen to pay in as much as possible.

leonotis

Hello EdInvestor
I am guaranteed an annual pension of 9.5% of the value of the fund at age 60. My fund isn't large due to the fact that their rules prevented me from increasing the premiums over the years - so they are at the same level as they were at day one. The fund is currently approximately 50K. It's a With Profits pension and it works just like an endowment policy - building value by adding bonuses annually and then , presumably a final bonus at the end (or not, as the case may be). So will stopping paying the premiums now have any effect on the final value of this fund, is the question, in view of the fact that they are no longer paying me any annual bonus - therefore the fund value is static at 50K - the same as it was over 3 years ago.

dunstonh

£50k at 9.5% = £4750

Lets say you were to transfer it and it grew to £70,000 over the next 5 years.
£70k x 6.32% = £4424

So, keeping it where it is guarantees you getting at least £4750. Moving it will leave you on a unknown annuity rate, currently around 6.32% on level basis and an unknown fund value which may only end up 55k or could be more. I used 70k as the top end of what is likely.

Based on that, you should keep it going. The critical yield for growth required to beat that GAR is just too high and unlikely.

leonotis

Thanks for that dunstonh. Whilst I have no intention of transferring my pension to another provider, I am trying to find out if it is best to stop paying the premiums and make my pension policy paid up, ie freeze it until I am 60, or should I continue paying the premiums, even though I'm no longer receiving annual bonuses.
I am curious as to whether stopping paying the premiums in these last few years will affect the final payout by much.

dunstonh

leonotis wrote:

Thanks for that dunstonh. Whilst I have no intention of transferring my pension to another provider, I am trying to find out if it is best to stop paying the premiums and make my pension policy paid up, ie freeze it until I am 60, or should I continue paying the premiums, even though I'm no longer receiving annual bonuses.
I am curious as to whether stopping paying the premiums in these last few years will affect the final payout by much.

Cutting out the premiums could have an impact. Some plans do actually have a minimum payout based on that premiums. With plans of that era, some of those minimums are higher than current values. Or, there may be a guaranteed sum assured to which bonuses are added to. The sum assured is dependent on premiums remaining to the end and ceasing premiums would reduce that.

Only way to know is to ask NU the questions or get an IFA to ask the questions on your behalf.

Milarky

The description of the situation here is reminiscent of the Equitable Life GAR policyholder - whose 'interest rate' is fixed and therefore the underwriter - in this case Norwich Union - is 'mysteriously' adjusting the annual return on the 'investment' (in this case to 0%) to offset the 'higher than usual' cost of the guarantee. That is my immediate suspicion anyway...

Being more generous to NU, would it be correct to assume that even without annual bonuses being added today, the policy is still appreciating in nominal terms?

The fund is currently approximately 50K. It's a With Profits pension and it works just like an endowment policy - building value by adding bonuses annually and then , presumably a final bonus at the end (or not, as the case may be).

That current valuation needs to be compared to 'guaranteed' value assuming they cut the final bonus to zero. How much of this value is a 'non guaranteed' final bonus for instance? That's the NU fudge factor is it not? They've all seen what happened at Equitable, but what policyholders there 'discovered' was that previously 'added' annual bonus was subject to a clawback in all events except 'contractual' ones (death or retirement)

I think that dunstonh's answer sort of assumed that the current policy value is 'safe' because presumably it has stopped falling in nominal terms. That leads to his calculation of a discount rate (which he does not set out explictly by plumping for a 40% over five years increase but which could be calculated from your own knowledge of the future premium payments plus the starting point of the transfer value - assumed to be no less than £50Know and £70K after five more years of paying in)

As to the paid up question, it might be possible to do the sums. You'd need to ask NU exactly what the implications for policy value of going paid up are - they'll have to tell how it changes the way they value the policy susequently.

You could then (a bit like dunstonh) take the difference in income terms between a paid-up and a non paid-up option (say it works out at £800?) Then take the the reciprocal of the 'non GAR' (like the 6.32%) which is about 16. multiply that by your income figure - that would be £12,800 in this made up example. That's what your five years of premiums have to grow to. Suppose your premiums are £160 per month (I 'm just plucking a figure here, you understand!) then they would add up to £9,600 with no growth. To grow to £12,800 they have to increase by 33.33% exactly (funny how these numbers just come out like that after you make them up isn't it?) Anyway you'd work out the growth ('x') required by doing the calculation:

V/P = ((1+x)^term -1 )/(term.(x)) where 'V/P' is just 1.3333 - the required increase ove the flat premiums you redirect from the paid up policy until 60. ('.' is the 'multiplication symbol', not a decimal point)

A bit of rough dabbling shows that at 6% your £9600 grows by about 13% over 5 years, at 10% it grows by about 22% and at 15% it grows by about 34% (bingo!) This does show how challenging achieving quite 'modest' growth over total premiums actually is - since the premiums are, on average, only invested for half the total time.

Sorry if I've muddied already cloudy waters for you, but the more ways you can look at your policy situation, the more 'confident' you should be able to feel about whichever of the alternatives you are drawn to.

Good luck

ManAtHome

Only other thing worth chucking in is whether you might be able to get an enhanced annuity (smoker, diabetic?) - could change the numbers a bit.

Note - I'm well behind the other contributors on this thread in pensions knowledge - just throwing in a "things to think about".