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Understanding MVRs And Penalties |
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What is an MVR?
MVRs - Market Value ReducersA Market Value Reducer (MVR), often referred to as a Market Value Adjuster (MVA), is a charge or a penalty imposed by the insurer on the investor, in order to dissuade them from cashing in their investment early.
Are they fair?
MVRs, Market Value Reducer, are designed to ensure that the amount of money paid out to an investor when cashing in their policy, is a fair reflection of the investors share in the with-profits fund. MVRs are implied to ensure that the surrender value, is not unfairly higher than the market value of the bonds assets, and that a fair share is left for the remaining policy holders.
The size of an MVR is entirely at the discretion of the insurer and in most cases reflects movements in the market value of the underlying assets within the with-profit fund. Some insurers have been known to charge MVRs as high as 30%.
Don’t confuse the MVR with an early surrender penalty!!
An MVR is distinct from any contract charge (typically applied in the first five years of a policy’s life) in order for the insurer to cover its expenses and profits supposing an investor wishes to cash in their policy early.
Historically, the application of MVRs by insurers has been relatively muted, however, recent poor stock market performance since the beginning of 2001, has seen more widespread application of MVRs.
In general, With-profits funds tend to lack transparency, which only becomes an issue when an investor wishes to exit the fund and finds doing so largely complicated. Suppose one wishes to withdraw some or all of their capital invested in a with-profits fund, at short notice, as a matter of emergency, an MVR would not only complicate matters, but would reduce the amount of the policy-holders own money which they would receive.
Investors should carefully consider a number of important factors before deciding to cash in their policies. Firstly, investors should asses the current asset mix of the fund, which will give an indication of both the financial strength of the fund, and the investment growth prospects. Also the current level of MVR Market Value Reduction and how long it may take to recoup the penalty if you did withdraw your money, and also alternative types of investment where you may be able to invest your money, after assessing the amount of investment risk you are willing to take. In short, the decision to exit a with-profits policy can be a complex, and a costly one, however, it is one which we believe investors should strongly consider.
To help, we recommend consulting an expert. Our local IFAs are on hand and are accessible through completing the enquiry form.
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