Unitised With-Profits risks?

Pastor_Corydon

There has been some alarmist talk about with-profits pension pots recently, and I wonder if anyone can advise whether it is worth hanging onto one, or transferring it.

I have a unitised with-profits Pensionbuilder from Scottish Widows used for my SERPS opt-out between 1987 and 2001, when I moved to a Eurozone country.

The fund seems to have done quite well recently: the transfer value is around £73k, £42k in units plus £31k terminal bonus.
It has a guarantee date of my 65th birthday, which falls next year, but this can be extended for up to ten years with no penalty. Units bought before 1994 (I suspect about 1/3 of my total) have a guaranteed growth of 4%. There is no GAR.

For tax reasons it would be sensible to defer taking this pension either as an annuity or by withdrawing it complelely, for two to three years. It also seems scarcely worthwhile to go to the trouble and expence of tranferring it somewhere else for three to four years. I expect by then to be living in a country where tax will be minimal if I withdraw the whole sum at one go.

Or would that be risky? I gather the greatest threat would be to the terminal bonus.

I’d be grateful for any insights.

SonOf

There has been some alarmist talk about with-profits pension pots recently,

By whom?

and I wonder if anyone can advise whether it is worth hanging onto one, or transferring it.

your adviser can.

For tax reasons it would be sensible to defer taking this pension either as an annuity or by withdrawing it complelely, for two to three years.

How would an annuity help defer it?

Albermarle

I have a very similar pension -with profits with SW. I was not aware of any alarmist talk ! Recent returns have also been OK .
The usual comment is that they are a bit old fashioned , not the best value, and opaque in how they work .
So I do not think they are ever recommended as a new product ( not sure you can even start a new one )
It is not the only pension I have , and I have decided to keep it as a defensive move , in the belief that it would offer some protection in the face of a market downturn ( hopefully !)

Pastor_Corydon

Thanks for those comforting words, Albermarle.

The alarmist talk, on this forum and elsewhere, concerns the volatility of the final (or terminal) bonus, which in my case is over 40% of the transfer value. Surely the risk is that this will be diminished or wiped out in the case of the "market downturn" that Albemarle mentions.

For units purchased before 1994 (in my case about 60%) there a guaranteed growth of 4% p.a. of the original bid price compounded.

The whole thing is in a single fund, the Scottish Widows With Profits Fund; and there is currently an MVA.
The fund hasn't done very well recently, and as it would suit me (especially for tax purposes) to defer touching until at least 2025, I don't know whether it is worth tranferring it or letting it potter on where it is. It needs only to be taken between one's 65th and 75th birthdays. Apart from the State Pension, it is my last UK pot; and I consider it a rainy day backup rather than something I'm relying on..

(SonOf: Of course an annuity wouldn't defer it: I meant defer taking it at all, either in the form of an annuity or in the form of the whole sum. And I don't have an advisor: it is scarcely worth having one for a pot this size; and in any case none will advise me because I live in the Eurozone; and no IFA here will advise me on a British pension).

SonOf

The alarmist talk, on this forum and elsewhere, concerns the volatility of the final (or terminal) bonus, which in my case is over 40% of the transfer value. Surely the risk is that this will be diminished or wiped out in the case of the "market downturn" that Albemarle mentions.

That is not alarmist talk. That is exactly how final bonuses work. Nothing new. Nothing unusual. The next stockmarket crash will not be the first stockmarket crash ever. WP funds have gone through crashes before. What is going to make the next one any different?

In 2015/16 there was a crash (a loss of more than 20%). What did you do before, during and after that?
How about 2008/9 or 2001-2003? or all the earlier ones?

WP funds with guarantees tend to be invested cautiously to reduce the liability to the provider. Do you know the equity content of your WP fund?

Malthusian

As the insurer has the right to reduce the real value (the transfer value) by 42% and you are planning to withdraw the money in 6 years+, the 4% guaranteed growth rate is pretty much a gimmick.

If a witch cast a spell which froze all markets forever and all asset values remained the same indefinitely, then Scottish Widows would have full discretion to cut the terminal bonus on the guaranteed part by 4% every year, meaning the guaranteed growth rate would have no effect at all. The guaranteed growth rate would only mean anything when the terminal bonus had been reduced to 0. At this point they could start applying a 4% Market Value Reduction each year on the guaranteed growth rate part, but normally you can avoid paying an MVR by taking the benefits at your selected retirement date (it depends on the contract).

In the event of a downturn Scottish Widows might drastically cut or remove the terminal bonus, or they might reduce it by significantly less than the fall you would see in a unit-linked portfolio. Nobody knows. Whether you should switch into non-With-Profits funds is a question of whether it is better the devil you know.

Other things being equal you are more vulnerable to Scottish Widows reducing the terminal bonus or applying a Market Value Reduction thanks to the guaranteed growth rate. Not only do they have to ensure that people don't take out more than their share of the fund is actually worth, but they also have to keep enough in reserve that they can continue paying 4% bonuses regardless of fund performance until everyone who has the guaranteed growth rate takes the money.

If you want to switch out of With Profits you may not need to transfer the pension. You may be able to switch funds internally with Scottish Widows. You would need to ask them whether they offer alternative funds via this pension.

Albermarle

Surely the risk is that this will be diminished or wiped out in the case of the "market downturn"

One reason I keep mine, is that in theory at least a with profits fund should be able to some extent to ride out a poor year or two in the markets ( I hope ) better than some other investment types.
However no market based investment can be immune to a proper market crash.

An additional point is that as it is an old pension, you will be limited in how you can take the pension when the time comes . This is a general issue with older pensions and not just with profits/Scottish Widows. It depends what you plan to do with it , but if you wanted to go into drawdown you would have to switch to a new pension at some point . Either with SW or someone else.

Linton

On the other hand my Prudential WP bond fund holding, including terminal bonus, has increased in value every year since I bought it in 2002 except for 2008 when it fell by 5%. So I am happy to keep it in my wealth preservation portfolio.