Malcolm Wheatley explains why he's cashed in his Equitable Life with-profits fund and invested directly in the stock market instead.
At last, there's good news for weary investors in under-performing personal pension schemes. And particularly so for with-profits policyholders of companies such as Equitable Life, who saw policy values barely budge as the FTSE 100 more than doubled from its March 2003 low of 3,287 to its July 2007 high of 6,716.
First, a warning: although I'm going to use Equitable as an example in this article, the option I'm describing applies to many more companies than Equitable. So if you have a with-profits fund as part of your pension savings, read on.
Two cuts in two months
A little over two months ago, on 31 December 2008, Equitable with-profits policyholders received some bad news: policy values were being reduced by 3%. So if, say, you had a policy valued at £30,000 on 31 December 2008, then on 1 January 2009 its new value would be £900 lower, at £29,100 -- ouch! And on 27 February, as markets continued to plunge, Equitable did it again, reducing policy values by a further 2%. That policy valued at £29,100 now became one worth £28,518.
But the point is this: those are the only reductions that Equitable has applied in the wake of the FTSE's fall from 6,716 in July 2007 to today's level of 3,700 or so. That's possible because only a small proportion of the Equitable with-profits fund is now in equities -- around 4%. Why? Because after the fund's collapse in December 2000, most of the fund was switched into fixed interest securities and bonds.
Meaning that in the past eighteen months or so, the FTSE 100 and related indices such as the FTSE All-Share have fallen much, much further than the fall experienced by Equitable's long-suffering with-profits policyholders. The markets, roughly speaking, have fallen by 45% or so, whereas Equitable's policy values have fallen by 5%.
Where's the upside?
The flip side of this, of course, is that when the market recovers, investors owning shares and index trackers will see a much greater increase than will Equitable policyholders.
In other words, there's a window of opportunity to leave Equitable, switch the money into the stock market, and experience a bigger gain than would almost certainly be the case if the money stayed in Equitable's with-profits fund.
Not every policyholder has the luxury of taking this route of course. Those furthest away from retirement and who have other assets to fall back on are in the best position to follow this strategy.
It's exactly what I have done with my own Equitable Life with-profits investments of £65,000 or so -- pension savings built up over two employments and a few years of self-employment before Equitable collapsed. I've opened a SIPP, transferred in my £65,000, and parked the lot in two low-cost index trackers, with the bulk of it going into a low-cost FTSE All-Share tracker.
Risky? Yes. Foolhardy? No, I don't believe so.
The window of opportunity that had opened was too good to miss, I judged. Equitable's 'market value adjustment' (the hit you take on withdrawing funds) was still a low-ish 5% (it had been much, much higher earlier in the decade), and the changes in the law relating to the protected right elements of my pension fund meant that I could take the lot out, rather than be forced to leave a few thousand pounds worth of protected rights pension messily trapped in Equitable's with-profits fund.
Will my pension fund effectively double, as the stock market returns to its former heights? I don’t know. But, like it or not, I'm going to find out.
You can find out more about index trackers here. We also have a thriving Equitable Life discussion board which has seen over 75,000 posts since it was set up in July 2000.
