With Profits Market Value Adjustment - Pension Transfers

With profits funds differ from standard unit linked funds that move up and down with the underlying investments. A with profits fund participates in both the underlying investments of the fund that the manager takes and the profits of the investment company, hence the name With Profits.

At any moment in time there remains a smoothing of profits and losses and money coming in and out of the with profits fund. Some of the profits within years of exceptional returns are held over to provide bonuses in years of poor returns. In theory the fund shouldn’t go down in value, but a company may apply a Market Value Adjustment.

A large number of transfers out of a pension fund can seriously deplete the profits held over, particularly since transfers out tend to increase when theres been a significant fall in the stockmarket, and as a result a Market Value Adjustment may be applied.

A Market Value Adjustment (MVA) is the insurance company's way of protecting the remaining policyholders and fund by providing some compensation to those remaining in the fund. ie you may be penalised if you decide to transfer out when an MVA is being applied. This is usually expressed as a percentage of your fund and can be as high as 10-15%.

As this can reduce your transfer value quite dramatically it is important that you contact your pension company to see if they are applying an MVA.

Part of the advice process is to ensure that you are aware of an MVA and the impact this can have on your fund. If you find you have an MVA applicable at this time, its not the end of the world, there are certain instances where they may not apply e.g. if your transferring to retire. You may also feel that if the market has dropped by 30% and your MVA is only 10% that now is an opportune time to switch over to a stockmarket based unit linked fund.