I have two with-profits pension schemes with Scottish Widows: one from contracting out the contributions, the other from a group pension plan.
I’ve read in the financial press recently that I should get rid of these pension schemes, even though there will be a market value reduction.
Is it worth taking the hit now, rather than waiting to see if my investment goes down further?
Ask the Professionals: Philip Pearon, a partner at P&P Invest in Southampton and investment portfolio specialist, says:
The case for with-profits investment is not black and white, so any action you take should reflect what’s best for you, given your circumstances.
In theory, with-profits provides a low-risk approach towards investment over the long term. The company awards profit to your plan on an annual basis – this is known as a ‘reversionary bonus’.
The level of the bonus is discretionary, and can go down as well as up in the future. But once it’s added, the company can’t deduct it from the plan, unless you surrender the policy before maturity.
At maturity, a final payment, or ‘terminal bonus’, is potentially available. Again, the level of this is at the company’s discretion.
However, with-profit funds normally invest heavily in shares, and as returns from shares over the last few years have been poor, this is reflected in the low level of bonus payments currently being awarded by most companies.
If you’re prepared to adopt a higher level of investment risk, you could consider an alternative to with-profits – you should benefit from the higher risk over the longer term. The company will offer you alternative choices of funds linked either to the performance of equities, fixed interest or commercial property.
However, before switching to alternative funds you should investigate whether an exit penalty, known as a ‘market value adjuster’, will be applied. How much this is will depend on the company.
It’s important to establish what the effect of this will be upon the value of your fund to see whether it’s worth paying in return for the potential to achieve higher returns.
If you don’t understand the alternatives to with-profits or the investment risk involved, you should seek advice from an IFA specialising in portfolio management.