MONEY COMMENT
Avoiding Exit Penalties On 'With Profits' Bonds

By Jane Mack (TMFJane)
August 19, 2003

If you're one of the poor unfortunates who invested in 'with profits' bonds before the market went pear-shaped you'll get a bit of a shock if you try and take your money out.

Many investors face the prospect of hefty penalties should they decide to cash in their polices. It's called a Market Value Reduction (MVR) but essentially it's an exit penalty and its purpose is to protect the investors left behind so that those who leave the fund don't take more than they're entitled to.

The theory behind 'with profits' investments is that the returns are 'smoothed out'. When the market's doing well, product providers hang on to some of the profits instead of paying it all in bonuses so that when things are going badly, they've got some money to spare to continue paying bonuses to investors.

If a stock market slump lasts a long time, the provider will eventually run out of the back-up money and will be forced to impose an exit penalty on the investor instead. This is exactly what has been happening recently. Companies are now having to pass the full extent of shortfalls on to investors through terminal bonus rate cuts and the application of larger and larger MVRs.

According to financial consultants, Chartwell Investment, investors who are worrying that they're with a fund that is likely to give poor returns in the future have three options.

1. Sit it out and hope that either the returns will improve or that MVR penalties will be reduced. It could be a long wait though
   
2. Make regular withdrawals. Virtually all 'with profits' bonds allow investors to take a certain level of regular withdrawals from their policy without an MVR applying. The amount varies depending on the product but it does allow you to slowly remove your money without having to pay the MVR.
   
3. Check your policy to see if there is a clause allowing investors to get at their funds free of the MVR on a specified date in the future, for example, the 5th anniversary of the bond issue. Chartwell has produced a list of the major 'with profits' bond providers and whether their policies are likely to include MVR free clauses.

If you've got a 'with profits' bond, it might be worth checking the small print to see what your next move could be.

Find out more about 'With Profits' Investments.