How to deal with a penalty

There are many with-profits plans of all types which will have values reduced by a penalty. This is where there is a reduction in the amount that is available should you decide you want to cash-in, switch or transfer your with-profits investment.

You may have a pension for example and receive an update or statement which tells you it is worth £40,000. However if you want to transfer the money into some other type of fund the transfer value might be quoted as £36,000. The penalty for transferring is £4,000 or 10%.

This can be quite a disincentive to transfer. Penalties often arise because the with-profits company you are with has decided that although they have attributed bonuses and a value which is £40,000 - the actual underlying asset value is not as worth as much as this.

This is one of the problems with with-profits, what you see is not always what you get (or what you really have!). However is a penalty actually something you should shy away from?

There is no reliable answer to this, because each and every case must be judged on its own merits.

To understand why a penalty may be something you want to accept consider the following example:

You are in a with profits fund with a current value of £40,000 but a transfer out value of £36,000. If you want to move your money elsewhere you have to accept a £4,000 penalty. On reviewing your position it is clear that the bonuses over the past five years have been 0%;0%;1%;1%;1%, i.e. a total of 3% for the whole five years. The analysis of your fund suggests there is no obvious reason to expect anything more than 1% per year for each of the next five years.

If this is correct then you can expect your £40,000 to be worth around £42,300 in five years. If you moved now with your £36,000 then you would need your new investment to get a total return of about 17% or 3% per year; if it achieved 5% per year you would have over £45,000 in five years.

Your new investment will – hopefully – NOT have any possible penalties, whereas your existing with-profits may continue to have a penalty or even have a higher penalty

In other words if you make this sort of analysis the real penalty is staying with the current poor with-profits fund, moving it is not the penalty it seems.

Penalties apply for all sorts of different reasons, for example:

• Penalties can be short term or relatively permanent
• They can apply on certain occasions
• They may be avoidable (for example with-profit bonds may allow regular withdrawals penalty free, but apply a penalty on full withdrawal)
• There may also be dates (known as spot dates) when penalty free withdrawals can be made
• There may be no penalty on death or on the maturity date of the plan.

All of these factors should be analysed if you are in a position where you have a penalty. There may even be occasions when you can negotiate with the with with-profits company to reduce or remove the penalty.

If you have a plan with a penalty then we can help, we can produce a review and an analysis which will give you the assessed facts of your position and what you can do about this – we do this via an individual report (click here to get your own personalised report).