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What to do with with profits funds?

puk999
Posts: 552 Forumite

Hello,
I'm 43, and have two Standard Life pension accounts. The first is not currently being contributed to and holds 2 with profits funds. Here are the details of that account when I log into their website:
My other account is one that my employer and I pay into and holds "normal" funds that I reevaluate periodically. It's got £18k in. I much prefer this account as I have freedom to swap funds around. I'm also happy to take on a bit of risk and be responsible for the consequences (good or bad). I find the with profits to be too opaque, conservative and inflexible.
I'm considering getting out of these with profits funds. When I spoke to SL a couple of years back they mentioned I might lose money by transferring. I'm looking for advice/opinions on how to determine what I'll lose, whether I should do that or just leave them. At the moment I don't feel informed enough. The figures suggest to me that if I transferred out today, I'd get £53,749.38 to put into other funds, right?
I'm 43, and have two Standard Life pension accounts. The first is not currently being contributed to and holds 2 with profits funds. Here are the details of that account when I log into their website:
Pension Millennium With Profits Fund £28,698.10 Pension With Profits Fund £18,922.84 All funds £47,620.94 Transfer value at 08 Nov 2013 Final bonus/Reduction * £6,278.44 Adjustment ** £-150.00 Total transfer value £53,749.38
My other account is one that my employer and I pay into and holds "normal" funds that I reevaluate periodically. It's got £18k in. I much prefer this account as I have freedom to swap funds around. I'm also happy to take on a bit of risk and be responsible for the consequences (good or bad). I find the with profits to be too opaque, conservative and inflexible.
I'm considering getting out of these with profits funds. When I spoke to SL a couple of years back they mentioned I might lose money by transferring. I'm looking for advice/opinions on how to determine what I'll lose, whether I should do that or just leave them. At the moment I don't feel informed enough. The figures suggest to me that if I transferred out today, I'd get £53,749.38 to put into other funds, right?
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Comments
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Update: I've just spoken to Standard Life about this. The guy on the phone said I would only lose the £150 (the adjustment, also called the MVR?) if I transferred today. The details are hazy, but when I spoke to the lady a few years ago she said I would lose thousands. As far as they're aware, I'm retiring at 65 and the MVR reduces towards that age, but as that's 22 years away he said that doesn't explain the big reduction in MVR.
The Pension With Profits Fund is guaranteed to grow at 4% and the Pension Millennium With Profits Fund is only guaranteed not to go down.
If it's only £150 I'm going to lose, I'm more than happy to transfer.0 -
I wonder if something changed a year or two ago, as my L&G pension (also WP, ex-contracted out) that I can view online used to have a large MVR figure, but then changed to zero!“In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing at all.” - Roosevelt0
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Im not an expert on with profits. But my understanding of it is when the fund does well they put aside some money to pay out when its not doing so well.
As the last few years have been pretty good for growth im guessing that there is a few pounds in the bonus pot which you will get a cut of if you leave before its paid out0 -
The Pension With Profits Fund is guaranteed to grow at 4% and the Pension Millennium With Profits Fund is only guaranteed not to go down.
Why are you considering leaving that?
In my estimations, with a moderate attitude to risk you could hope to make 3-8% p.a - so a 4% guarantee is pretty good.
Any other investment wouldn't have a guarantee that a fund won't fall in value either, such as the other WP fund that doesn't have the 4% guarantee.
So I would suggest only leaving if you have the capacity to lose some of this fund (would it have a big impact on your retirement if you didn't have this pension?) and/or if you have a speculative attitude to risk.
What is MORE important is ensuring you're still contributing towards your retirement.
Consolidating into your 'active' pension is fine, but I would think carefully that you're happy to forego the guarantees.
A further consideration is cost. It's sometimes tricky to see what a WP pension charges are because the fee is taken before the 'bonus' is announced. But you would normally expect to pay 1% pa. In truth, with default funds, your newer pension will be comparable, probably cheaper.0 -
Puk999, I'm in the same boat as you, I have SL wp funds like yourself, Pension with Profits and the millennium with profits fund. I have been debating this in my head now for a couple of years as to what I should do.
The Pension with profits having a guarantee of 4% is quite reasonable, but the bugbear for me is the millennium fund as the growth rate for the last few years has been very poor 0.5-1%, so it's not even keeping ahead of inflation.
Difficult decision as to what to do!!0 -
Why are you considering leaving that?
Thank you for your response :beer:
I find the WP funds confusing and not that transparent. Am I right in saying they can periodically change the guarantees so (for example) the 4% guarantee could be changed to a 2% guarantee further down the line?
The bonuses that get added seem to be reached by a committee. What are these decisions based upon? Is it fairly arbitrary?
The inflexibility of transfer I'm experiencing now is another reason I don't like them. I understand this is a consequence of the smoothing feature though!In my estimations, with a moderate attitude to risk you could hope to make 3-8% p.a - so a 4% guarantee is pretty good.
I'm happy to be a bit risky and feel that 4% could be improved upon quite a bit. I also realise I could lose money outside of these WP funds. I'm ok with that, but you have also given me pause for thought on whether to just leave them alone as an "unerodable bedrock" and be risky on the other pension plan that I'm currently paying into. Having about £30K for the next 23 years in a fund that doesn't (currently) guarantee any growth whatsoever grates me though!What is MORE important is ensuring you're still contributing towards your retirement.0 -
Update: I've just spoken to Standard Life about this. The guy on the phone said I would only lose the £150 (the adjustment, also called the MVR?)
<snip>
If it's only £150 I'm going to lose, I'm more than happy to transfer.
Update: I emailed Standard Life just to be sure about the £150 being the MVR. Here's their response:The adjustment figure on this plan is not an MVA, but an allowance for the future Initial Unit
Charges due to be deducted over the term of the contract.
Plan K576302000 is not currently sowing an overall MVR/MVA, but the element of Final Bonus
applicable on transfer does allow for a penalty of £204.58 from the Pension With Profits Fund
i.e. the Final Bonus from Millennium With Profits is currently £6,502.26. N.B. You cannot
transfer on a fund by fund basis, but you are able to switch out of one with profits fund and
leave the other.
The plan is invested in with profits and has valuable guarantees which would be lost if you
transferred out.
For the Pension With Profits Fund investment, the guaranteed amount will grow by at least
4% a year before charges.
For the Pension Millennium Fund investment the guaranteed amount before charges is
guaranteed not to fall. We aim to increase it over time by adding bonuses therefore increasing
the value of the guarantees.
Given current economic conditions, it's a great position for you to be in. These types of
guarantee are no longer generally available on the open market and you can't add to the
amount already invested in the Pension With Profits Fund.
The guarantee applies to the fund value but not the transfer value of the plan.
Where a plan's fair payout is more than the unit value a final bonus will be paid. However,
where a plan's fair payout is less than the unit value an appropriate Unit Price Adjustment
(UPA) will be applied. The UPA depends on the term and investment conditions throughout
the life of the plan.
Our current practise for a customer who decides to surrender, transfer or switch their with
profits investment before their originally selected retirement date is to pay out a value which
broadly reflects the asset value of their share of the with profits fund. This value does not
benefit from the same level of smoothing or unit price guarantees as the value used on
retirement.
I guess that means it'll cost me £150 + £204.58 to switch out of them.
Could I transfer all of this to a SIPP with SL, or another provider (e.g. Fidelity)?0 -
Puk999, I'm in the same boat as you, I have SL wp funds like yourself, Pension with Profits and the millennium with profits fund. I have been debating this in my head now for a couple of years as to what I should do.
The Pension with profits having a guarantee of 4% is quite reasonable, but the bugbear for me is the millennium fund as the growth rate for the last few years has been very poor 0.5-1%, so it's not even keeping ahead of inflation.
Difficult decision as to what to do!!0 -
Yes, it's difficult to know what to do. How much longer until you retire? I'm a couple of decades away and feel there is enough scope to enjoy better rewards without actively doing much (i.e. just selecting some other funds). Depends on attitude to risk I suppose.
I'm 50 so I'm looking at probably another 15 years, I don't believe that SL can reduce the 4% on the Pension with Profits so I'm reasonably happy with that as it is at least ahead of inflation. As for the millennium with profits, that a different ball game, that's not even staying level with inflation.0 -
The bonuses that get added seem to be reached by a committee. What are these decisions based upon? Is it fairly arbitrary?
A with profits fund is a fund of mixed assets, meaning it covers a diverse portfolio (equities, property, fixed interest and cash).
Behind the scenes therefore the investments within WP are making gains in a way you'd expect, sometimes up, sometimes down.
The team behind them are buying and selling as per their expectations.
At the end of the year the team tot everything up:
What the total fund has made in the last 12 months.
What the future holds.
What the historical performance has been.
What historical bonuses have been applied.
They can then decide how much bonus to offer its investors. That's where the idea of 'smoothing' comes in. They will not offer you 100% of the growth.
They need to keep some of the funds profits in reserve for bad years.
Some see this as a massive negative and some see this is a positive (and that's for you to decide).
A with profits fund is therefore designed to keep the line on the graph straight, by ironing out volatility, and is seen as a cautious-moderate fund (although the exposure to equity defines its risk-rating, and this can be different from one provider to the next (and some, like Pru, have variations within it's arsenal)).
Another point to note is that the charges are removed before the bonus is announced, which makes it look as though it's free, which of course it isn't.
...
There is no right or wrong answer, it's understanding what you have got, understanding the alternatives and matching a solution that fits your needs and objectives.0
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