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With Profits Pensions Tumble 38% in Three Years

With Profits Pensions Tumble 38% in Three Years

Category: Pensions

Updated: 11/05/2017
First Published: 07/10/2005

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The latest survey by Investment, Life & Pensions Moneyfacts has revealed the worrying extent to which falling with profits pension payouts are continuing to scupper many investors dreams of a comfortable retirement. The figures show that an individual with a with profits personal pension retiring today could be almost 38% worse off than someone who made the same premium contributions but reached retirement just three years ago. In July 2002 a male retiring at age 65, having contributed to a with profits personal pension for 20 years would on average have accumulated a fund worth £98,450. However, the same man retiring today, after paying identical premiums would be left with an average with profits pension value of just £61,578, a fall of almost 38% in three years (see Table 1).

The survey examined the latest unit-linked and with profits pension returns based on a £100 gross monthly contribution. It found that, even over the last 12 months, longer term payouts have continued to slide alarmingly. The averageten year and 15 year with profits return have dropped by more than 4% over the last 12 months, whilstthe average 20 and 25 year payouts have plummeted by more than 12%.

Despite being viewed as a cautiousalternative to equity funds, more with profits pension funds have failed to show a profit after five years than balanced managed funds. Abbey (£5,585), AXA (£5,578), Clerical Medical (£5,686) and Scottish Life (£5,841) are all guilty of posting a loss on the £6K worth of contributions invested.

Table 1: Average With Profits Pension maturity values July 2002 - July 2005
Figures based on £100 gross per month as at 1 July

5 years10 years15 years20 years25 years
July 2002£6,499£18,016£41,037£98,450£226,874
July 2003£6,234£15,954£34,388£81,502£190,379
July 2004£6,253£15,016£30,391£70,214£162,101
July 2005£6,310£14,396£28,877£61,578£141,539
3 year change-2.9%-20%-29.6%-37.4%-37.6%

Unit-linked pensions: Climbing high
At the other end of the spectrum the steady recovery in equity markets has had a beneficial impact on the performance of unit linked pensions, with the average maturity values higher over all of the terms surveyedcompared with the situation 12 months ago (see Table 2). Particularly impressive is the extentto which five and ten year unit linked returns have now recovered from their low point of two years ago.Back in July 2003 we reported how all the unit-linked pensions surveyed were worth less than the total contributions paid in after five years and most were still worth less than the total premiums invested after ten years. However, this is no longer the case.

Average five year returns have risensharply from a paltry £4,902 in July 2003 to £6,510 in the latest survey, an increase of 32% in justtwo years. Only two companies failed to return more than the total £6K contributions paid after fiveyears: AXA (£5,921) and Clerical Medical (£5,895). Meanwhile, the ten year figures show a healthy 7% increase over the last 12 months with the average payout increasing from £12,542 to £13,486. All theunit-linked pensions surveyed are displaying a profit after ten years.

Table 2: Average Unit linked pension maturity values July 2002 - July 2005
Figures based on a £100 gross per month as at 1 July (Balanced Managed)

5 years10 years15 years20 years
July 2002£5,121£13,434£26,845£51,530
July 2003£4,902£11,950£24,048£42,688
July 2004£5,563£12,542£24,831£42,965
July 2005£6,510£13,486£26,209£45,415
3 year change27.1%0.4%-2.3%-11.8%

In many cases the gap between unit linked and with profits returns is closing rapidly. Particularly significant is the fact that theaverage five year unit linked return (£6,510) has finally overtaken the average five year withprofits payout (£6,310). And over ten years the gap between the two rivals is a mere £910,compared with a difference of over £4K two years ago. Richard Eagling, Editor of Investment, Life & Pensions Moneyfacts said: "The continued improvement in the performance of unit-linked fundsin our latest pension survey will come as a great relief to many pension investors and will hopefullyhelp to restore the public's confidence in pensions. In contrast to unit-linked pensions, the newsfor with profits pension holders remains less encouraging. It is clear that, for many with profitsproviders, the twin problems of low bonuses and reduced equity exposure are continuing to hamperthe performance of their funds. With profits funds were designed to smooth out investment returns,yet those unfortunate enough to be retiring now will be receiving up to 38% less than pensionerswho retired just three years ago."

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