Potential with-profits reprieve for thousands of Equitable Life policyholders

24th March 2014

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Hundreds of thousands of Equitable Life savers have been handed a lifeline to help them potentially escape the group’s £5.5bn with-profits fund as the firm announces it is to boost potential pay-outs and scrap its exit charge writes Philip Scott.

From 1 April the firm, which shut down to new business in December 2000, will double the payout from 12.5% to 25% it hands to maturing policies or to those who transfer or surrender or their investment. It has also temporarily got rid of its 5% exit penalty.

The move, which impacts some 345,000 policyholders comes on the back of the insurer revealing it was sitting on a capital surplus of £691m.

With-profits policies, which typically come in the form of a pension, endowment or a with-profit bond investment were commonly sold by life insurance groups as low-risk investments, which allocated investor cash across a combination of shares, property, bonds and cash.

The idea was that savers would be paid annual bonuses that are ‘smoothed’ by holding back some of the return in good years, so they can be paid more than they have earned in the bad years ‘ thereby, smoothing out any stock market volatility. But in practice this has far from come to fruition.

But instead of being able to freely take their cash and invest it somewhere else the vast majority of investors were handcuffed by an exit penalty, known as a market value reduction (MVR), which can be be added or increased at any time.

Equitable Life’s with profits fund is currently paying an annual bonus of 2% for pensions and 1.6% for life insurance policies and the gross return of the fund, the vast majority of which is invested in bonds and cash was just 5.6% in 2012.

Danny Cox, head of financial planning, at Hargreaves Lansdown says: “Policyholders who have stuck with the Equitable have finally been rewarded. Those who have felt trapped by poor returns and MVRs can now head for the exit with as much as 30% more in their pocket. Importantly, any right to compensation will be retained. If nothing else, the 345,000 Equitable Life policyholders should take this opportunity to review their policies and check whether they remain suitable for their planning.”

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