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Reasons to leave existing pensions where they are: with-profits pensions that expect to pay big bonuses at maturity

‘With-profits’ describes a type of investment that was offered to pension savers in the past but is now much less common.

The value of a with-profits investment is protected to some extent from the ups and downs of the financial markets and tends to rise each year through the award of annual bonuses. Often a terminal bonus is added when the policy matures, which may be some years in the future.

With-profits plans vary widely. A few are well run, such as those from Prudential, Aviva and Legal & General. However, many with-profits plans have not been well run in the past and cannot be expected to pay big bonuses in future.

Determining whether your with-profits plan has been well run in the past, and is therefore worth keeping, is not always easy. We suggest that you consider the following indicators.

First, does the company still offer with-profits policies to new customers or is it closed to new business and only involved in managing plans taken out in the past? The former category is preferable, because a firm is more likely to attract new customers if it is producing good returns for its current ones. 

Second, find out how the with-profits plans are invested. You want at least 50% to be in shares. Some have most of their money in bonds and cash, which have less scope to rise in value over the long term.

Finally, look at the bonuses being paid on your policy. With-profits returns are generally based on two bonuses: annual bonuses, which are often guaranteed; and terminal bonuses, which aren’t guaranteed. Many with-profits funds are paying small annual bonuses, or none at all, and are relying mostly on terminal bonuses, which means there is less security and more risk of volatile returns. In other words, you want a plan with a good record of guaranteed annual bonuses.

Plans that fail these tests may be worth cashing in so that you can transfer the money to your new amalgamated pot. Ask the company whether any penalties (or so-called market value adjustments, which would reduce the value of your fund) apply before you do this.

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