Conventional plans were sold widely until the early 1990s. They promised a fixed amount (the sum assured) at maturity/retirement/earlier death. Each year, following the bonus declaration, we send customers information about the fund performance together with a statement telling them what bonuses, if any, have been added. It's no longer possible to increase payments to these types of plans.
This section aims to provide answers to some of the questions we are asked by customers.
- What are the different types of bonus?
- How does a with-profits plan work?
- How are fund returns added to plans?
- What is smoothing and how does it work?
- Why is the bonus rate different to the growth in the fund?
- How much is my plan worth?
- What guarantees does my plan have?
- How much might I get back when my plan ends?
- When does my plan end?
- Can I end my plan early?
- How can I get more information about my plan?
- How do I change my address?
1. What are the different types of bonus?
There are 2 types of bonus, a regular bonus we might add each year and a final bonus we might add when a plan ends.
More details are available in the How we manage the with-profits 90:10 fund for conventional plans booklet. We are not adding more regular bonuses to pension plans because they have a high level of guaranteed growth which has built up through past bonus additions. It is unlikely that future regular bonuses will be added to these plans as plan holders could get more than their fair share from the fund.
A final bonus is added, if appropriate, so each group of customers receives a fair share of the fund. Most pension plans do not get a final bonus because of the high rate of growth which has built up through past bonus additions. The only pension plans currently attracting a final bonus are Esitran Pension Plans taken out between 1991 and 1995 as they don’t have such high guarantees.
» Find out more about bonus rates for your type of plan
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2. How does a with-profits plan work?
In return for the payments you agreed to make over the plan term we gave a guaranteed amount at maturity, and/or a guaranteed amount at death (which may not be the same amount). We need to keep some of the money you pay us to cover the death benefit risk and some for expenses, such as commission to the adviser and administration. The remainder is available for us to invest on your behalf.
Included in the guaranteed sum at maturity was an allowance for growth. Every year, when the actual fund returns are known, we decide if we can increase the amount we guarantee by adding a regular bonus. As this is an actual amount we promise will be added at maturity, it also includes an assumption as to the growth we expect to achieve between the date it’s added and the maturity date. Your payments build up like this:
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3. How are fund returns added to plans?
The profits and losses of the fund are shared out 90% to policyholders and 10% to Zurich. Overall, however, we can only pay out what the fund achieves. We add the profits of the fund to plans in 2 ways - regular bonuses and a final bonus. We don’t add all of the fund growth using regular bonuses. We hold some back and add it as a final bonus if the fund performance justifies it. This allows us to ‘smooth’ plan payouts so they don’t change significantly from year to year.
In setting a final bonus, we group plans together by age and type and look at the fund performance for that group to decide a fair payout. We usually set bonus rates once a year, but we regularly review the rates we pay out and sometimes change them more often. This makes sure each group of policyholders continues to receive a fair share.
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4. What is smoothing and how does it work?
Smoothing is a method of reducing the ups and downs in the value of your investment by paying out the returns through a system of bonuses. This is a special feature of with-profits.
Smoothing works by holding back some of the returns from good times to help pay out bonuses in poorer times. Equally, losses made in poor times may also reduce gains in good times. In the long term we can only pay out what the fund’s assets achieve. We will do this by increasing guaranteed payouts when it is prudent.
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5. Why is the bonus rate different to the growth in the fund?
Any regular bonus increases the amount we guarantee to pay out. The regular bonus we add takes into account the guarantees built up in the past and our expectation of future investment returns. When your plan ends, we will consider adding a final bonus if the fund performance has been greater than the assumptions made when setting regular bonus rates.
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6. How much is my plan worth?
The bonus statement we send each year, tells you the bonuses we’ve added and the minimum amount we guarantee at maturity/retirement.
If you want to know the current surrender or transfer value, please contact us.
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7. What guarantees does my plan have?
Your plan benefits are guaranteed provided you maintain any regular payments. Guarantees may apply only at a particular date, for example the maturity date or retirement date. Most plans also have a guaranteed amount payable on death. These are not necessarily the same as the guarantees at maturity. The bonus statement will tell you if guarantees apply to your plan. Some of these may be valuable and you should make sure that you understand them before taking any action. You can find more information on some specialised types of guarantee below:
Guaranteed annuity rates (on conventional with-profits self-employed or executive pension plans).
Some pension plans include a guaranteed rate for turning the plan value into an income at retirement. These are probably better than can be obtained anywhere else.
The guaranteed rates apply regardless of how much a plan is worth, and we still offer a favourable rate should you want to take your benefits early. Your bonus statement tells you the income we guarantee from your plan at the plan retirement date as well as the minimum age at which guaranteed rates apply.
Mortgage endowment guarantees (on plans that have accepted all recommended premium increases)
Some conventional endowment plans contain a review clause, the purpose of which is to monitor the performance of the plan and recommend necessary increases to ensure the plan remains on track. If all the recommended increases are taken up, then the plan is guaranteed to reach its target amount at the maturity date, subject to all premiums due being paid.
Life cover
A life plan will provide a guaranteed amount if you die before your plan ends.
Waiver of payment cover
You may have chosen to pay for cover to waive regular payments if you are unable to work through sickness or disability. See your plan documents for the exact details of the cover provided.
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8. How much might I get back when my plan ends?
Your bonus statement shows the minimum guaranteed amount available at maturity if you continue making any regular payments. Any future regular or final bonus we add would increase the actual amount paid. We can provide an illustration based on current assumptions using different rates of investment return. These will give you a range of values for your plan using assumptions for investment growth and our expectation of future charges.
If you have an endowment plan, we will send you an illustration each year showing you if it’s on track to meet the target amount at maturity. Find out information about the illustrations we send out on mortgage endowments » more
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9. When does my plan end?
You can see this in the ‘Your plan details’ section of your bonus statement or if you have a mortgage endowment, this can be found in the ‘Your plan now…’ section of your plan update letter. Alternatively, contact us to find out.
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10. Can I end my plan early?
Yes. We’ll need the written instructions of all the plan owners and the plan documents. To make sure we only deal with the plan owners, we’ll also ask for evidence of identity such as a bank statement or copy driving licence. The confirming your identity leaflet will give you more information about this process.
If you have a pension plan, you will normally have to wait until 55 before you can start taking your pension income. The guarantees applicable to some plans may not be available until age 60, so please check with us before making any decisions. If you belong to a pension scheme, you will need to deal with the scheme administrators or if this is your own plan, contact us for more details of your options.
You may also want to consider the alternative choices available under your plan detailed in the Understanding your choices section.
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11. How can I get more information about my plan?
If you want more information about the plan, please talk to your adviser or contact us – we’ll be pleased to help. If you haven't got an adviser, here are details on how you can find one.
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12. How do I change my address?
You can let us know your change of address by calling us or completing and returning the change of address form. If you are also changing your name, we will require proof of this.
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