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Summary of Profits for Investors

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Summary of Profits for Investors document sample

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									With-Profits Summary

                                               How we manage your with-profits investment




Summary for conventional plans                                  Introduction
taken out with Friends Provident                                This summary describes our current approach to managing
                                                                the money you have invested in our With Profit Fund.
Life Assurance Limited                                          We’ve set it out in the form of six questions you might ask
                                                                and our answers to those questions.
This summary explains the main points
about investing in our With Profit Fund for                     The six questions are:
conventional plans taken out with Friends
Provident Life Assurance Limited.                               Q1 What is a with-profits investment?
It is important that you read this summary                      Q2 What affects the bonuses that may be
to help you understand how we manage                               added to my plan?
your with-profits investment. Please keep
it with your plan documents. If we make a                       Q3 What types of bonus do you declare?
material change to this summary, we’ll send
                                                                Q4 How do you decide bonus rates?
you an updated version when we next send
you a statement.                                                Q5 What risks are borne by with-profits
If you would like further information about the With Profit        policyholders?
Fund either speak to your financial adviser or call us on
0845 602 9199. Our full Principles and Practices of Financial   Q6 What if I decide to move out of
Management (PPFM) document also provides more details.             with-profits?
If you would like a copy please visit our website at
www.friendsprovident.com/withprofits or call us on              This summary covers conventional with-profits plans originally
the above number.                                               taken out with Friends Provident Life Assurance Limited.
                                                                However, there are various versions of this summary,
Our website also contains the latest annual reports to
                                                                covering different types of plan. So if you have more than one
with-profits policyholders from both Friends Provident and
                                                                plan with Friends Provident, you may need to refer to more
the With-Profits Actuary.
                                                                than one version.
Q1 – What is a with-profits                                       Q2 – What affects the bonuses
investment?                                                       that may be added to my plan?
A with-profits investment provides:                               The bonuses that we are able to add to your plan depend on
                                                                  a number of different factors. The main ones are:
•   the possibility of long-term investment growth
                                                                  •   the distribution of the excess capital (the former ‘inherited
•   a guarantee of the minimum amount of cash or pension,
                                                                      estate’ allocated to policyholders). This excess capital is
    or both, you will receive on certain dates, for example
                                                                      the amount of money held over and above the amount we
    at the end of the plan term or in the event of death, as
                                                                      need to pay benefits including any guarantees. This is an
    long as all the payments due have been made. Your plan
                                                                      important factor
    documentation sets out the minimum guaranteed amount
    and details of any other guarantees                           •   the effect of smoothing

•   some protection against the ups and downs of the              •   the cost of the guarantees we offer to you and to other
    investment markets. We achieve this by a process known            investors
    as smoothing, which spreads out investment profits and
    losses from year to year. Smoothing is explained in more
                                                                  •   any profits or losses from sources other than investment

    detail in our answer to Question 4.                           •   our charges and expenses

We combine your money with that of other investors in             •   any tax paid on investment income and capital gains
the With Profit Fund. We invest the Fund with the aim of
achieving long-term investment growth and ensuring we can         •   the investment return we achieve on the With Profit Fund.
                                                                      This is usually the most important factor and we explain
pay all guaranteed benefits as they fall due.
                                                                      more about this in ‘Our investment strategy’ below.
All profits on business written within the With Profit Fund are
passed on to you as a with-profits policyholder in the form
                                                                  Our investment strategy
of bonuses. Payouts at the end of the plan term are equal to
the guaranteed amount plus any bonuses. This allows us to         We invest the Fund in a wide range of investments, such as
provide, over time, a more stable investment return than you      company shares, property, government and company fixed
would get from most other investment products linked to the       interest bonds (a type of loan) and cash. We decide how
investment markets. In periods of poor investment returns,        much we invest in each type of investment. In doing this
bonuses may not be added.                                         we take into account the potential for high returns (reward)
                                                                  and the exposure to possible poor returns (risk) that each
As long as you continue regular payments, with-profits plans      type of investment presents. The amount we earn on these
may also provide valuable life cover, which would provide a       investments is the most important factor affecting how much
guaranteed sum of money in the event of death.                    you might receive as a with-profits policyholder.

                                                                  The values of investments can rise and fall. Investments
                                                                  such as shares and property tend to be more variable in
                                                                  value than bonds and cash. Over the longer term, shares and
                                                                  property have, historically, produced higher returns than other
                                                                  investments. Because of this, we aim to invest a significant
                                                                  part of the Fund in shares and property, with the remainder
                                                                  being invested mainly in bonds and cash.




2
By investing in a wide range of investments, the investment
                                                                   Q4 – How do you decide bonus
return on the With Profit Fund should be more stable
than most unit-linked funds investing in only one type of          rates?
investment such as shares. The mix of investment types             When deciding what regular bonus rates to pay we take into
will vary over time and may differ from that chosen by             account:
other companies.
                                                                   •   the investment return earned by the Fund since we last
We may alter the mix of investments from time to time to               reviewed bonus rates
reflect our views on the relative attractiveness of each type
of investment. We also need to make sure we can meet all           •   the previous year’s bonus rates
guarantees. This means there may be times when we have
                                                                   •   the impact of smoothing investment returns in previous
to hold lower risk investments, such as cash and bonds.                years
The latest published mix of investments is set out in the
‘With-Profits Summary Supplementary Information’ page on           •   the need to distribute the excess capital within the With
our website at www.friendsprovident.com/withprofits.                   Profit Fund to with-profits policyholders over the remaining
                                                                       lifetime of the Fund

Q3 – What types of bonus do                                        •   what future investment returns are likely to be.

you declare?                                                       When deciding what final bonus rates to pay we also take
                                                                   into account:
We use two types of bonus, regular bonus and final bonus, to
share out profits over time and among investors. So we can         •   the amount of regular bonus we’ve already added, relative
distribute profits fairly between different classes of investor,       to the total investment return
we’ve created different With Profit Fund bonus series, each of
which may be eligible for different bonus rates. The series to
                                                                   •   the plan’s Asset Share.

which your plan is linked depends on your plan and when you        The Asset Share for your plan is
took it out. Your plan documentation and yearly statements
will show the bonus series your plan is linked to.                 •   the total payments you’ve made

                                                                   •   increased by the investment return achieved by the With
Regular bonus                                                          Profit Fund

We declare regular bonuses as a percentage of the                  •   less some deductions.
guaranteed amount, or as a percentage of previously
                                                                   The investment return used is that achieved from the assets
declared regular bonuses, or both, and these are added each
                                                                   held by the With Profit Fund that back asset shares.
year. We review regular bonus rates at least once a year and,
depending on investment conditions, we might not declare           We make the deductions to cover
any regular bonus in a particular year.
                                                                   •   our expenses

Final bonus                                                        •   the cost of life cover
When guaranteed benefits are payable, or if you otherwise          •   the cost of guarantees and
move out of with-profits, we may add a final bonus. Final
bonus rates may go up or down at any time. We review final         •   tax.
bonus rates at least twice each year.                              We then decide how much to pay out as regular bonus and
Depending on the particular plan type, we may calculate final      how much to pay as final bonus. We aim to pay out only part
bonus as a percentage of the guaranteed amount, or as a            of the investment returns that we earn through the regular
percentage of previously declared regular bonuses, or both.        bonus so that we can build up a cushion in the fund against
                                                                   periods of poor investment returns. If the cushion is not
The final bonus rate depends on how long the plan has              required, we can pay it out in the form of final bonuses.
been going.




                                                                                                                                  3
The Board of Friends Provident Life Assurance Limited             Target Payouts
is responsible for deciding bonus rates after considering
                                                                  For most classes of with-profits business, we decide payouts
the advice of an actuary appointed to do this and after
                                                                  after considering the Asset Shares of sample representative
independent review by a sub-committee of the Friends
                                                                  plans. This helps us to ensure that fairness is maintained
Provident Board known as the With-Profits Committee,
                                                                  between different groups and generations of plans.
which includes at least one independent person.
                                                                  When converting Asset Shares into payouts we apply a
Deciding the rates of regular bonus                               process known as smoothing, which spreads out investment
                                                                  profits and losses from year to year. As an example, if our
We set the regular bonus rates after considering how
                                                                  investments go down in value, we may not reduce payouts
investment values have moved in the past and how we
                                                                  by as much in the short term.
expect them to move in the future. We aim to set regular
bonus rates that change gradually from year to year,              Smoothing means that
smoothing out variations in investment returns. The future
expected long-term investment return is very important.
                                                                  •   if we have earned less on our investments than expected,
                                                                      we will generally pay out more than Asset Share in the
For example, we may reduce regular bonus rates if we
                                                                      short term
expect future investment returns to fall.

Any regular bonus that we add increases the guarantees
                                                                  •   if, however, we have earned more on our investments than
                                                                      expected, we will generally pay out less than Asset Share
under the plan. The proportion of assets we hold in lower-
                                                                      in the short term. Smoothing is discussed further in the
risk assets depends on the level of these guarantees. If we
                                                                      next section.
did not try to limit regular bonus rates to a sustainable level
then we would have to hold more lower-risk assets to ensure       Over time we aim to pay 100% of Asset Share on average at
we could meet the guarantees we are creating. As a result         the end of the plan term or, where there is no maturity date,
we would expect the investment return on the fund, and            when we make a payment under the terms of the plan, or if
therefore total payouts to policyholders, to be lower.            you cash the plan in early. We generally review final bonuses
                                                                  twice a year and between reviews we aim to keep payments
Deciding the rates of final bonus                                 between 80% and 120% of Asset Share.

We may be able to increase the value of your plan when it         We set final bonus rates to achieve overall payouts that
reaches the end of the plan term, or is cashed-in in the case     are close to the target percentage of Asset Share over the
of a life plan, by giving you a final bonus.                      longer term. In some circumstances the value of your plan
                                                                  before considering final bonus may be higher than the Asset
We will decide final bonus rates for each bonus series broadly
                                                                  Share. If this happens we are unlikely to add any final bonus.
to reflect any excess of the Asset Share over the amount
                                                                  The diagram below illustrates this.
already guaranteed through adding regular bonuses.

To help us to do this we look at the value of a sample plan
with an Asset Share similar to your plan adjusted to smooth
out extreme variations in investment returns over time.




4
                                                                  Because of smoothing, payouts on similar plans will not
                                  Final bonus                     generally change by more than 20% from payouts a year
                                                                  earlier. Smoothing will not protect against long-term
                                 Regular bonus                    market falls.
    Fair payout
                                                                           Illustration of smoothing for a conventional policy
                                  Sum assured


                                                                                                                         Asset value
 Our calculations                What you see
                                                                                                                         Payout
Fair payout is higher than the guaranteed benefits


                                 Regular bonus
                                                                   0   3    6    9   12   15 18 21     24 27 30
                                                     Minimum
                                                                                          Months
                                                     payout if
    Fair payout                                      guarantee
                                  Sum assured        applies
                                                                  Guarantees
                                                                  In unfavourable investment conditions the guaranteed
 Our calculations                What you see                     amount under your plan may be more than the Asset Share.
Fair payout is lower than the guaranteed benefits                 If so, we would pay the difference from the With Profit Fund.


For some classes of business, Asset Share does not
represent a fair guide to payouts, in which case we use other
                                                                  Q5 – What risks are borne by
methods that we consider appropriate.                             with-profits policyholders?
Our aim is to pay all with-profits benefits out of the assets     With-profits policyholders are exposed to a number of risks,
held in the With Profit Fund. Our shareholders may provide        known as business risks.
support in the unlikely eventuality that the assets in the With   We give examples of business risks below; with details
Profit Fund are not enough to cover payouts.                      of some of the actions we have taken to reduce their
                                                                  potential impact.
Smoothing
                                                                  Some plans have a guaranteed annuity rate at the end of
With any investment approach we expect investment values          the plan term.
to vary over time. There will be periods when investment          We have set aside explicit reserves within the With Profit
values fall and others when they rise.                            Fund, and our investment strategy should limit the exposure
As mentioned above, the With Profit Fund includes an              to changes in market conditions.
important feature, called smoothing, which reduces the            There is a risk that policyholders will die sooner than
immediate impact of large changes in investment values on         expected.
your plan. We control the value of your plan by using bonuses     We reinsure some of our life assurance risks with
to even out some of the highs and lows in investment values.      other companies.
When smoothing, we spread out investment profits and
losses from year to year. Over the longer term we aim to pay      There is a risk of a fall in market values.
out all investment profits to investors in the form of bonuses.   We use a mix of suitable investments to help
                                                                  protect the With Profit Fund against the worst falls
                                                                  in individual markets.




                                                                                                                                   5
Q6 – What if I decide to move                                                             If you need further information about the With Profit
                                                                                          Fund speak to your financial adviser, or call us on
out of with-profits?                                                                      0845 602 9199.
You may decide to move out of the With Profit Fund. This will
happen if you cash in your life plan or transfer your pension
plan to an alternative type of pension arrangement. We will
decide the cash value available on a basis that is fair to all our
policyholders.

Before deciding whether to move out of with-profits, you
should consider any guarantees that you may be losing,
particularly guaranteed minimum annuities or annuity
conversion rates under pension plans. These guarantees
may be valuable when inflation and interest rates are low.

Plans may include life cover, which provides a guaranteed
sum of money in the event of death. This would normally end
if you cash in your life plan or transfer your pension plan to an
alternative type of pension arrangement.

Please speak to your financial adviser if you are thinking of
moving out of the With Profit Fund.


Alternatives to cashing in a life plan
As an alternative to cashing in a life plan, it is normally
possible either to use a life plan as security for a loan to
get short-term finance, or to make a regular payment plan
paid up, whereby you stop payments but the plan remains
in force with reduced benefits. One other option is to trade
your life plan.




Friends Provident Life and Pensions Limited
Registered and Head Office: Pixham End, Dorking, Surrey RH4 1QA
Incorporated company limited by shares and registered in England number 4096141
Authorised and regulated by the Financial Services Authority
www.friendsprovident.com     Telephone 0845 602 9189
FRIENDS® and ‘the power of FRIENDS®’ are registered trade marks of Friends Provident in the UK and other countries



XF144 02.09

								
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