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Penalty-free transfer dilemma

Skandia Life pensions development senior manager Brian Newbould responds

to Standard Life&#39s views on transfers

Standard Life&#39s article headlined, Think about customers&#39 needs (Money

Marketing, April 27), casts serious doubts over how many top pension

providers can claim to offer their customers penalty-free transfers between


The article contains a paragraph which throws into doubt how many

companies have been able to market their high early transfer value plans

over recent years.

The paragraph says: “Where a customer has already made a significant

investment in with-profits, it may not make good financial sense to

crystallise the terminal bonus that has been built up.”

In simple terms, this means customers will be penalised as the terminal

bonus will be less than the amount they are entitled to.

It is worth remembering that terminal bonuses represent the difference

between the amount earned on the contributions and the amount already added

by way of reversionary bonuses. Terminal bonuses are subject to smoothing

but the paragraph clearly implies a deduction beyond that required just for


This underpayment must be due to good old-fashioned with-profits

discretion being exercised in one or a combination of the following ways:

To pay less terminal bonus on transfers than the amount due in order to

build up “free reserves”.

To recoup out of the terminal bonus the balance of the high acquisition

expenses not recovered at the time of transfer by the “penalty-free”

level-loaded contract design.

In either case, the effect is the same – customers are suffering

retrospective charges. They will, therefore, have been misled by their key

features documents which would have shown high transfer values without any

such addit-ional deductions.

The table above shows the transfer value to expect on with-profits

policies taken out one, two, three, four and five years ago for a single

premium of 10,000 and a regular premium of 100 a month.

It can be used as a ready reckoner by applying it pro rata to the level of

premium actually paid by a client.

The table assumes the with-profits fund has performed in line with the

average balanced managed fund over the period.

It assumes a 5 per cent bid/offer spread and an allocation rate of 100 per

cent for single premiums and 95 per cent for regular premiums.

If anything, this is likely to be an understatement of the asset

performance, and hence transfer value, especially for those offi- ces which

have advertised themselves as financially strong and, therefore, able to

invest an above average amount in equities.

Transfer values below these values will indicate either poor investment

performance on the part of the with-profits fund or retrospective charges.

It will be very difficult to blame a large shortfall on the cost of


No doubt, this is an area where the regulators will take a close look

next year as the high-profile “penalty-free” contracts marketed over recent

years are transferred to stakeholder pensions.

The number of such transfers, and hence the potential hidden penal- ties

involved, could be enormous.

Once again, this all points to the need for with-profits to come clean and

to start to operate in a far more transparent way.

In particular, mixing up charges and investment performance in terminal

bonuses should stop.

Charges must be made explicit as they are in unit-linked contracts so

there is no possibility of retrospective charges in future.

Then, with terminal bonuses only there for investment purposes to make up

the shortfall in the bonuses that have been added, customers must be able

to invest safe in the knowledge that there will be no hidden investment

penalties and terminal bonuses will make up the short- fall, no matter when

they are crystallised.


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