Bond penalties slashed

By DAILY MAIL REPORTER
Updated:

 

SAVERS locked into poorly performing with-profits funds by special early exit penalties are starting to see their shackles loosened.

Big names including Norwich Union, Scottish Widows, Standard Life and the Pru are now whittling away the market value reduction (MVR) penalties they charge when savers cash in or move their money to other companies.

Norwich Union now charges an average MVR of 8%, down from 12% in April last year.

Prudential takes away 4.7% if a bond is cashed in, a cut from the average of 6.3% over 2003.

And Standard Life has axed the flat MVR of 8% for endowments and 16% on pensions. Instead, it hits plans taken out between five and seven years ago with individually worked out penalties. These insurers say there may be further cuts to come.

Prudential UK actuary Tom Imber says: 'It is quite possible MVRs will continue to fall in 2004 if the markets continue to improve at the levels recently seen.'

Millions of savers, horrified by the way their savings have slumped in value, have found that they cannot move their money elsewhere without being hit by the hitherto unused penalties of MVRs.

Hidden away in the small print, MVRs let insurers slap on penalties at will when stock markets are falling. In some cases they have topped 30%.

A cut in these penalties is vital for hard-pressed savers stuck in with-profits funds giving a worse return than the poorest bank or building society accounts.

Abbey-owned Scottish Mutual and Scottish Provident pay no bonuses but savers are trapped by MVRs of up to 24% if they dare move their money elsewhere.

Many savers with money locked away in insurers' vaults could be in for a long wait before their MVRs fall significantly. With-profits funds with little or no money invested in shares will be slow to cut their MVRs as they miss out on the stock market recovery.

London Life, NPI and Axa Equity & Law still have penalties of up to 28%.

And a whole host of companies - Axa Sun Life, Clerical Medical, Co-op Insurance Services, Eagle Star, Friends Provident, Legal & General, Royal London, Royal & SunAlliance, Scottish Equitable and Scottish Life - demand 20% or more as an exit penalty.

A further spanner in the works comes with plans that have guaranteed growth rates. Insurers argue that the extra cost of these guarantees means it will take longer for MVRs on these pension and endowment plans to fall.

Many NPI plans, for example, have such guarantees. A spokesman says: 'Any change in MVR will depend on fund returns which need to cover guaranteed bonuses.'

• DAVID MAHONEY hasn't had a penny added to his Scottish Mutual with-profits bond since January, 2003. But if he moves his money elsewhere, he will be hit by a 19% MVR exit penalty.

He is one of the 46,000 savers relying on his bond to pay an income. The Abbey-owned company's decision to axe all bonuses for 2003 means he is being forced to dig into his capital for income.

Retired project manager Mr Mahoney, 59, from Grantham in Lincolnshire (pictured with his wife Gillian) is angry. He does not feel that the bank, which has closed its fund to new business, has explained the long-term effects of that decision on his money.

Mr Mahoney, who took out his bond on an execution-only basis in 2001, says: 'This is a major investment and we can't afford to have that kind of money doing nothing. We've had nothing for a year now, which is a horrendous situation to be in.'

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