Advisers should be proactive in reviewing with profits

The Financial Services Authority have recently given an indication that financial advisers should be proactive in reviewing clients that have with profits investment policies. There are a number of factors to consider when reviewing with profits contracts.

General factors to consider:

• Investment objective – does the policy still serve the purpose it was taken out for. Have your investment objectives changed since the policy was taken out? How has the policy performed to date?

• Timescale – how long is left before you want to cash-in the investment? Are you looking to invest over the short, medium or long term?

• Attitude to risk – does the asset allocation match your the risk profile? Is this likely to be the case in the foreseeable future?

• Tax position – if the investment performance indicates encashment of the fund should be considered, would this lead to a chargeable gain to income tax now or at some point in the future? Is it possible to avoid this in any way?

Specific factors to consider:

• Guarantees and options lost on surrender – what is included in the policy which would be lost on surrender? What life assurance benefits would be lost if the policy is cancelled? How important are these benefits to you?

• MVR-free exit points – are there any MVR-free dates at which it will be possible to leave without penalty? Is it possible to drip money out of the fund instead, perhaps by taking MVR-free regular withdrawals?

• Asset mix – would the asset mix on a replacement policy better match your risk profile and investment objectives both now and in the future? How important is it for you to have control over the asset mix?

• Future performance potential – what are the prospects for the fund moving forward, taking into account any known changes to the ownership of the fund? To what extent are the prospects for investing in equities restricted?

• Cost of surrender – what penalties and MVRs would be levied on surrender? Would any possible future windfall payment be lost on surrender?

• Cost of the replacement policy – what set-up costs would be incurred by taking out a new policy? Is it possible to transfer the entire fund value, taking into account the impact of any MVR and income tax liability on surrender?

• Maintaining the life cover on surrender – how would the current life cover under the existing policy be replaced, if necessary, on surrender?

FSA 10 Questions:

The FSA has a list of ten questions on its consumer website which are designed to help consumers understand what type of with-profits policy they have and what may be the best course of action going forward.

The questions highlight the key issues for consideration, and should prove useful as a guide for assessing client’s situation and needs and also pre-empting some of the questions that they may have about their policy.

They are as follows:

1. What sort of policy do I have?

2. Does the policy still meet my needs?

3. How long have I had the policy and how long is left?

4. What can I expect my policy to be worth if I keep it until it matures?

5. What benefits does my policy have?

6. What could I get if I cashed in my policy today?

7. Is there any way I can cash in my policy without the company charging a surrender penalty?

8. If I do cash in the policy, what should I do with the money?

9. I've received a letter from my insurer saying I can switch to a unit-linked fund - should I?

10. Should I move my money to another insurer?

If you feel that a review of your with profits policies are required please feel free to contact us on 05600 494 327.

Alternatively you can obtain a copy of the FSA money made clear information fact sheet on with profits at FSA with profits