Is 4% SM With Profits Series II a good return? AMC 1%? Any reason to stay?

davyfm

I have a few Scottish Mutual SM With Profits Series II pension units. They pay 4% minimum a year (and never anymore! [edit: in my memory]) and cost 1% in AMC. [edit: and have further policy fees].

These units are currently managed by Phoenix Life. The current transfer value is above the current fund value.

What do people think of 3% net a year for pension growth?

It seems Phoenix Life only pay the minimum bonus on these units that they manage, regardless of good or bad times in the market. If Phoenix Life accumulate better returns on the underlying holdings over time then who will benefit from that? Phoenix or the unit holders that stay the course? The workings of these units are not very transparent!

I am thinking to transfer these funds in to another pension account (for simplicity and self selection). It is not much money, just a few thousand pounds. Are there any good reasons to stay with these Phoenix Life units?

Thanks for opinions!

dunstonh

What do people think of 3% net a year for pension growth?

Depends on the objective. If the person is low risk and close to retirement then 3% net of charges is perfectly fine.

It seems Phoenix Life only pay the minimum bonus on these units that they manage, regardless of good or bad times in the market. If Phoenix Life accumulate better returns on the underlying holdings over time then who will benefit from that? Phoenix or the unit holders that stay the course? The workings of these units are not very transparent!

Many With Profit funds, especially those with a low equity content as this fund will have, are not back to the pre dot.com values yet for the underlying fund and the insurer is suffering the risk. That is why so many insurers no longer off the funds or have sold their life and pensions book at a loss on book value.

redbuzzard

Thoughts only. No conclusion!

They are adding the "minimum" because they are underwater on the guarantee...presumably also why the TV is more than the fund value.

If I had the option just now of putting c. 20% of my pension funds into a guaranteed 3% annual return, I'd consider it, even if it breaks my 'don't time the market' rule :shocked:

Are there any other guarantees associated with the plan, to consider before bailing?

davyfm

Thanks dunstonh.

I forgot to say that I am approx 20 years from retirement. Also the current transfer value is about 110% of the plan value (in the past TV has been lower then FV so I assume the underlying holdings are doing OK right now?). The current value is under 5K.

davyfm

Other benefits? Life cover is NONE. Death return basis is 100% of policy value. Possibly some protected rights? - but they can not tell me by phone. This small pension dates from 1990s and was contracted out. Thanks.

dunstonh

I forgot to say that I am approx 20 years from retirement. Also the current transfer value is about 110% of the plan value (in the past TV has been lower then FV so I assume the underlying holdings are doing OK right now?). The current value is under 5K.

So, its not just 3% you are making. You are guaranteed 3% but you are getting the potential for more.

davyfm

Yes, sorry, let me be clearer: they pay 4% minimum and from a previous statement of additions I do not recall seeing them ever paying more than the minimum for many years.

I think this is the source of my mistrust in these funds. I understand they moved from SM to Resolution and now Phoenix. What I don't understand is why performance is grounded at the minimum contracted increases. Is it because underlying assets collapsed or performed badly? Is it because Phoenix have a policy of paying the minimal returns and take any excess growth via fees or some other route? The lack of transparency about what the underlying investments are and how they perform make these units hard for me to understand and compare. The lack of any increase above the minimum for so long makes me suspicious as to why that is.

dunstonh

What I don't understand is why performance is grounded at the minimum contracted increases.

Annual bonuses are guaranteed. Once added, they cannot be taken away. The final bonus is variable and can be taken away. Most WP fund providers put the barest minimum into the annual bonus and use the final bonus for the bulk of the return.

The lack of transparency about what the underlying investments are and how they perform make these units hard for me to understand and compare.

Every WP provider has to issue documentation and accounts on the fund. The information is there and it is assessed by third parties. It can be quite a read but it is transparent enough in that respect. It will never give you direct returns like a unit trust but then they dont give the security that the WP fund would. Smoothing will always lack some transparency due its very nature. As does the provision of capital security and the fact most of these plans are from a different era and not designed to work to modern standards.

The lack of any increase above the minimum for so long makes me suspicious as to why that is.

It is just common sense on their part. You would do the same in their position. You wouldnt be able to afford to do anything different.

mania112

You'd struggle to find a pension that guarantees 4% now (and that fund you have is presumably closed to new business)

Are you sure it's a net 3%? With Profits usually factor the cost of the fund before they announce bonuses?

kidmugsy

If you're getting a steady 4%p.a. it's doing a lot better than gilts. Why not just treat it as a superior gilt-equivalent part of your portfolio and ensure that the rest is in shares, property, gold or what have you?

davyfm

Thanks everyone for the replies and to Mania112 for asking about AMC. After more questions to Phoenix Life and putting my statements in a spreadsheet I can now say:

The units increase in price at about 4% a year which is the minimum guaranteed for Scottish Mutual SM With Profits Series II.

The AMC is "built in to the unit price" and is a "hidden cost that does not appear on the statements" which I understand as AMC charges are taken from any underlying investments.

There is an additional fee called a "monthly policy fee" made by cancelling held units every year. For my plan (sub 5K) this "fee" is about 1% of the plan size (at current fee rates). In general I am not sure if it is a fixed or a percentage fee so for others it might be a lower percentage. I had thought this was the AMC but is additional to that.

I asked about terminal bonus. Phoenix say the current terminal bonus is reflected the current transfer value since both are based on the available payable funds (or some phrase like that). For me, there is a 10% increase in the transfer value over the fund value. In the past TV has been lower than FV.

The underlying funds do not seem be out performing the 4% guarantee much over time since it is only +10% in the 15 years the policy has existed and this at at time when markets are high. With the AMC the underlying investments would need to be averaging in excess of 5% p.a. before any increases started coming through. Would Phoenix be motivated to achieve underlying growth over 5% when that is enough to pay the minimum 4% guarantee and their AMC?

Further the "monthly policy fees" at circa 1% p.a. reduces the guaranteed 4% return to 2.96% (at current rates). (1.04 * 0.99).

The summary seems to be a steady 2.96% return after fees (at current rates) with expectation of only limited additional returns if any.