Will I gain or lose out when Equitable Life convert 'with profits' pensions to 'unit linking' policies?
07 July 2019
Question by Tori
Hi, hope you can help me. Back in 1988 when I was 17, my Dad advised me to opt out of SERPS and proceeded to set me up - A With-Profits Personal Pension Plan with Equitable Life. Fast forward a lot of years (it's now worth c£23K) and I've recently received a 'Proposal' from Eq Life which they are asking policyholders to vote for and then get High Court Approval to proceed with. They have said it will mean the following for me:- * The value of my with-profits policy will be uplifted * Any investment guarantees will be removed * The increased value of my policy will be converted to a unit-linked policy I don't really understand whether this is a proposal I should give my approval to as I don't understand whether I will potentially gain or lose from the changes stated. Given the company's rather dodgy track record I am loathed to go with something new as I'm sure it's just a way of them not having to pay out as much to people. Am I right to be cautious?
Answered by Boring Money
Effectively, Equitable Life are looking to scrap 'with profits' policies, and convert them to 'unit linking' policies to Utmost Life and Pensions.
They are trying to manage risks within the business and close down the business of Equitable Life. I agree - they haven’t had the best track record!
Pay-out of 'with profits'
On the upside, they will increase the pay-out of 'with profits' value to 60-70%, in comparison to the usual 35% at the end of policy date.
However, this is not guaranteed and I am unsure how you would analyse their ‘trust’.
This 35% sounds like a lot, but do bear in mind that this would have been equivalent to bonuses that you should have received if it was invested in the 'unit linked' pensions, during the good investment years.
It sounds like you will be a getting a higher pay-out by coming out of it 'with profits', and you will have the opportunity for that value to grow if invested in 'unit linked' pensions on the markets after the pay-out.
This may not be good value if you have a guaranteed bonus rate of 4% (policies can differ- so would be worth checking).
You might still have 15 years till your bonus date.
That’s a lot of guaranteed bonuses over a long period of time - you will not get this type of guarantee in 'unit linked' policies which are invested in the markets.
Overall 'unit linked' policies are easier to understand as your funds will go up and down with the funds you are invested in (dependent on the risk you take). Whereas, 'with profits' pays out bonuses and smooths out returns, which makes them ideal for more cautious investors.
This being said, they haven’t had a good track record of paying out the ‘fair’ bonuses in the last 10 years, if you had invested in equities. Your value would have increased significantly more than 'with profits', as 'with profit' funds horde the growth so that they can pay it out to you when markets fall.
It sounds like a good idea with a potential for an uplift, and will be converted into an easy to understand 'unit linked' pension.
You must ensure that if this happens, you review the risk of the funds you are invested in, as they will likely put you in default funds.
My caveat is, if you have any guaranteed bonuses on your Equitable Life pension (such as 4%), you could potentially lose from this high court approval without the guarantee of a 4% uplift every year.