Download Your guide to investing in With-Profits

Your guide to investing
in With-Profits
Investing in the PAC With-Profits Range of Funds
through International Prudence Bond (Spain)
> Contents
What's a With-Profits investment?
3
What affects how much I might get?
5
What are the bonuses?
6
How are the bonuses decided?
7
What if I decide to move out of With-Profits?
9
Where can I find out more?
11
How to contact us
11
This guide explains the main
points of a method of investing
called “with-profits”.
We’ve produced this guide to
describe how Prudential
Assurance Company Ltd (PAC)
manages the money invested
in our PAC With-Profits Range of
Funds through International
Prudence Bond. It summarises
PAC's current approach to
managing its With-Profits Fund.
If it makes a significant change to
its approach in the future, we’ll
write to tell you.
2
We’ve answered some of the questions you might ask. The guide generally assumes that
you'll keep your bond for the longer term. However, page 9 explains certain important
factors if you choose to move out of the PAC With-Profits Range of Funds before then.
In this guide we describe the way that with-profits works in the context of a bond which
ends on death and we talk about the benefits payable on death. The value of your
investment may fluctuate and is therefore not guaranteed.
You may not get back the full amount of your investment. The value of the bond depends
on the profits made by the long term fund of The Prudential Assurance Company Limited
and how these profits are distributed.
If, when you’ve read this guide, you still feel unclear or unsure about investing in
with-profits, you should seek further advice from your financial adviser. If you wish
to contact us directly, our full contact details are on page 11.
> What's a With-Profits Investment?
With-profits is an investment
that aims to smooth the return
on your money over the course
of your investment. Over the
medium to longer term, any
return should be steadier, year
on year, than if the value of your
bond fully reflected the rise and
fall in stock markets.
The With-Profits Fund
“Smoothing”
When you invest in our PAC With-Profits
Range of Funds, your investment is pooled
with other investors’ money in part of the
With-Profits Fund of The Prudential
Assurance Company Ltd (PAC), called the
Defined Charge Participating Sub-Fund
(DCPSF). This takes place through a
reassurance arrangement which means
that all of the benefits payable from our
funds are provided by PAC. The DCPSF
invests in a mix of company shares,
property, government bonds, company
bonds and deposits. The proportion that is
put into each of these different
investments, which are also known as
assets, will vary from time to time.
Shares in companies and property are
higher risk than some other types of
investment. Their value tends to fluctuate
more, but historically they have produced
higher returns over the longer term and
PAC believes that they will continue to do
so. Because of this, the fund currently aims
to keep a significant part of its investments
in shares and property. PAC might revise
this position if its view on the relative
performance of different types of
investment changes.
By combining your savings with those of
other investors, you can get a better
spread of assets than you could achieve
by investing on your own.
Your share of the performance of this
with-profits investment will be paid to
you through a system of bonuses,
described later in this guide. Because
our PAC With-Profits Range of Funds are
reassured into The Prudential Assurance
Company, the Board of PAC is responsible
for setting the level of bonuses that apply
to the units in your bond.
The value of your investment may
fluctuate and is therefore not guaranteed.
You may not get back the full amount of
your investment. The value of the bond
depends on the profits made by the longterm fund of The Prudential Assurance
Company Limited and how these profits
are distributed.
The challenge is that, while PAC believes
shares and property will generally rise
more in value than fixed interest
investments and deposits over a long
period such as 20 years, the return is also
much more volatile. One year the
investment may do very well, but the next
could see a slump. So instead of simply
sharing out what the fund makes – or loses
– each year, a With-Profits Fund reduces
some of the fluctuations in performance
over the time you hold your bond.
Although smoothing means that profits
can be spread from one year to the next,
the aim is to pay out all of the profits
earned by the fund over the long term.
This means that with-profits policyholders
as a whole neither gain nor lose as a result
of the smoothing policy. Smoothing is
applied so that the actual amounts payable
(known as claim values) change only
gradually over time.
This means that the investment risk of a
With-Profits Fund is lower than many other
ways of investing in shares.
The chart shows how smoothing can work.
3
“Fair share” payouts
There are a number of different factors
that influence the bonus on with-profits
investments and PAC has to decide how to
take account of these factors when setting
the bonuses.
This is achieved by tracking the “fair share”
of the assets of the With-Profits Fund. To
determine the fair share, we take the
payments made, less an allowance for
expenses and charges, and apply the
actual rate of return earned on the fund.
The fair share is the level that is targeted
for claim values before PAC does any
smoothing. This is then adjusted to allow
for smoothing, to determine the actual
claim value to be paid.
Value
Some gains
held back
Some gains
held back
Pay out some of the
held back gains
Pay out some of the
held back gains
Time
Smoothed Value
Unsmoothed Value
This graph is not representative of any particular Prudential International fund,
product or specific time period. Its sole aim is to explain the smoothing concept.
Guarantees
There is a guarantee on the amount of money payable on death (either first or last death,
depending on your contract). In this case, the Regular Bonuses added to your bond each
year can't be taken away (see “What are the bonuses?” on page 6). So if the stock market
crashes before or on death, we’ll pay at least the guaranteed amount at that time. In all
other circumstances the amount you might get back isn’t guaranteed.
The minimum value payable on death increases the longer you hold the bond because we
take into account the Regular Bonuses that have already been added to your bond.
4
> What affects how much I might get?
A number of factors affect the total level of
profits or losses earned by the fund and
different companies will use different ways
of calculating how much of the total profits
will be used to pay bonuses on their withprofits policies.
The investment performance will depend on how much of the fund is invested in the
different types of asset. For example, PAC believes that a fund which invests a higher
proportion in shares will, over the long term, achieve greater returns. This is because
shares generally provide a higher return than fixed interest or deposit assets.
The biggest factor determining how much
you’ll get is usually the performance of the
investments in the fund, after any tax.
Other important factors are:
However, there are restrictions on how much of the fund’s assets PAC can put into the
stock market. This is because PAC has to make sure the fund is big enough to cover all
liabilities to policyholders at any time. If the value of the assets falls below a certain level,
PAC would need to put more money into low risk assets such as deposits. The
performance of different types of asset varies considerably over time. So PAC may
change the balance of the assets in the fund to:
>
the smoothing of investment returns,
>
any difference between the amount
actually paid to policyholders moving
out of with-profits and the fair share of
the total fund value at the time,
>
the cost of the guarantees provided to
you and other policyholders, and
>
International Prudence Bond
charges, which are described in
the Statement of Charges and the
Key Features Document.
The mix of assets in the fund
>
improve long-term performance, or
>
maintain the financial security of the fund.
5
> What are the bonuses?
Bonuses are the way you get your share of the investment profit of the fund. There are
two types.
Regular Bonus
The Regular Bonuses are added to bonds throughout each year to gradually increase the
guaranteed benefits payable on death (first or last, depending on your contract).
PAC usually decides the Regular Bonus once a year. However, it reserves the right to
change Regular Bonus at any time.
Final Bonus
Final Bonuses make up the difference between the guaranteed benefits and the overall
smoothed claim value. These bonuses help to return to each policyholder a fair share
of the profits of the fund, while reducing the impact of short-term investment market
changes. Final Bonuses won't be known in advance of the time the claim value is paid.
>
You may receive a Final Bonus to increase the value of your investment on death (first
or last, depending on your contract).
>
You may also get a Final Bonus in certain circumstances if you move out of with-profits
at other times, but this is not guaranteed.
6
Final Bonus may vary or be removed
at any time and is therefore not
guaranteed.
The overall bonus you receive will depend
on the date on which you invested in withprofits. Different levels of bonus apply to
different groups of investors.
The investment performance will depend
on the mix of assets in the fund.
> How are the bonuses decided?
PAC will normally aim to hold over 50% of
the fund in higher risk (and so, potentially,
higher return) assets, such as stocks and
shares. Most of the rest is in fixed-interest
investments, such as government bonds,
company bonds and deposits.
This is the average for all investors –
the percentage that applies to your
investment will depend on when you
enter and leave the PAC With-Profits
Range of Funds, and which currency
denomination you invest in.
The profits which are not paid out as
Regular Bonuses will build up with the
aim of paying the Final Bonus. In the
meantime, these profits increase the
flexibility, when appropriate, to invest in
higher risk but potentially higher return
assets such as shares.
Regular Bonus
The Regular Bonus rates declared represent a prudent proportion of the expected future
investment return (after any tax and charges). So the long-term view of future investment
returns is very important in deciding how much to pay out each year. If PAC expects
investment returns to fall, it will reduce the Regular Bonus to bring it in line with its
expectations for the future, even if actual returns in recent years have been higher.
The guaranteed minimum value payable on death (first or last, depending on your
contract) will increase as Regular Bonuses are added. This means that PAC has to
limit the Regular Bonus so that the assets in the fund can support the increased level
of guarantees.
If it didn’t do this, the guarantees in the fund could become so large that PAC would
need to increase the percentage of the fund’s assets invested in lower risk assets such as
deposits. PAC would then expect to achieve a lower total return over the long term on
your investment, even though the Regular Bonus could be higher.
While Regular Bonuses, once added, can't be taken away, the amount you get back may
be reduced if a Market Value Reduction (MVR) has to be applied (see “What if I decide to
move out of with-profits?” on page 9).
An MVR is never applied on death.
The yearly statement we send you will
include details of our current bonus rates
for your bond.
The main aims of PAC’s bonus policy are:
>
to give with-profits policyholders a
return on the payments they have
made that reflects the earnings of the
underlying investments, while
smoothing the peaks and troughs of
investment performance, and
>
to ensure that with-profits
policyholders receive a fair share of
the profits distributed from the
With-Profits Funds by way of
bonus additions.
7
Final Bonus
This section describes how the Final Bonus
on death (first or last, depending on your
contract) or cash-in is calculated. PAC
expects the profits not paid out as Regular
Bonus to build up. It would then aim to pay
a Final Bonus from these profits.
A number of factors are considered when
deciding the Final Bonus, to determine the
total benefits to be paid when your bond
comes to an end:
The investment performance of the assets in the fund can vary considerably over time.
Although PAC aims to smooth some of the effects of the fluctuations, bonuses can still
vary quite a bit over different investment periods.
The fair share of the fund, after any allowance for smoothing, could be less than the value
of your investment including Regular Bonuses. If this is the case, there would be no Final
Bonus added.
The chart below shows how we add bonuses to your investment to determine the final
amount paid out.
What are the guarantees?
>
the fair share of the total fund value,
and
If you keep your bond going until death (first or last, depending on your contract),
PAC pays a guaranteed minimum value. This minimum value increases the longer you
keep the bond because it includes the Regular Bonuses you've received.
>
expected investment returns for the
coming year.
The example below is for illustration only and does not reflect any actual increase in
your investment.
PAC aims to avoid making changes to the
Final Bonus during the year, and does so
only if investment conditions change
significantly from those expected.
The way that smoothing works means that
in any one year the amount paid out may
be more or less than the fair share at that
time. The aim is that any smoothing of
profits or losses should balance out over
time so that, in the long run, with-profits
policyholders as a whole neither gain nor
lose as a result of the smoothing policy.
Value of
the bond
Payout amount*
Final
Bonus
Our Set-up Charges
Regular bonuses
Your original
investment
in the Fund
(after charges)
Total Regular
Bonuses
Your original
investment
in the Fund
(after charges)
Time
At the start
of the bond
Each year
At the end
of the bond
* If you take money from your bond other than when a guarantee applies, you may
receive less than the payout amount shown.
8
> What if I decide to move out of With-Profits?
This section describes what happens if
you choose to move out of the PAC
With-Profits Range of Funds.
This may happen if you:
>
cash in your bond, or
>
take a partial withdrawal, or
>
take regular withdrawals.
The way that Regular and any Final
Bonuses work may mean that the value of
your bond when you move out of withprofits is quite different to the value of the
underlying assets at that time. If PAC were
to pay an amount significantly above the
value of the underlying assets, it would
impact on the amounts it could eventually
pay to continuing policyholders.
Because of this, if you move out of the
With-Profits Fund, PAC may apply a
Market Value Reduction (MVR) to the
unit value (including Regular and any
Final Bonuses), to bring it closer to the
value of the underlying assets. The level
of the MVR would depend on when you
invested in the PAC With-Profits Range
of Funds, the subsequent performance
of the underlying assets in that fund and
the level of smoothing, if any, that PAC
decided to apply.
The reason for the MVR is to safeguard the
security of the Prudential With-Profits
Fund and to make sure that those who
remain invested in the fund are not
disadvantaged by others who might
otherwise cash in at higher levels than
would be justified by a fair valuation of the
underlying assets. The aim is to ensure
that all policyholders are treated fairly.
PAC can’t predict when it will apply an
MVR or the level of any MVR because this
will depend on investment performance.
It’s likely, however, that an MVR will be
applied during periods when investment
performance is lower than had been
anticipated or during periods when there
have been sharp falls in the stock market.
When we apply an MVR, the amount you
get back from your bond will not be less
than the fair share of the assets. Fair share
payouts are described on page 4.
If you cash in your bond or take a partial
withdrawal in the first five years, there may
also be an Early Cash-in Charge. This does
not only apply to with-profits investments.
Please see your Key Features document
for more information or speak with your
Financial Adviser.
PAC’s current practice is to apply an MVR
on cash-in or partial cash-in if the value of
the underlying assets is less than the value
of the policy including bonuses.
An MVR may also apply to regular
withdrawals.
If you have cancelled a previous regular
withdrawal request, we may allow you to
re-start these withdrawals at our absolute
discretion and reserve the right to refuse
any re-start of regular withdrawals. We
need to reserve this discretion to assist
with our overall management of the PAC
With-Profits Funds.The current limit is
defined in the Statement of Charges.
An MVR is never applied on death.
PAC reserves the right to review the
approach used to determine MVRs over
the terms of bonds in the event of a
significant change in the investment market
or because the number of people moving
out of the Funds increases substantially.
Any change to this practice would apply
immediately, both to bonds existing at the
time the change was made and to
subsequent new bonds.
The way that PAC applies smoothing
depends on the period of your investment
in the fund.
>
If you've been invested in the
With-Profits Fund for less than five
years when you move out of the fund,
you won't normally get any smoothing
benefit. For example, if there is a large
drop in share prices during this period,
you should expect the full effects of
this fall to be taken into account when
the payout value is calculated.
9
When PAC pays more than the unit price
PAC may pay more than the price of units you cash in if their value represents less than a
fair share of the market value of the assets in the fund at that time. It does this by adding a
Final Bonus.
When the Regular Bonus is decided, the aim is to hold back some of the investment
returns. In normal conditions, profits will build up over time and PAC expects to be able to
pay a Final Bonus.
When PAC may pay less than the unit price
PAC may reduce the value paid out on a regular withdrawal, cash in or full cash-in if the
unit value represents more than a fair share of the market value of the assets in the fund at
that time.
It does this to maintain a fair level of future payouts to everyone still invested in the fund.
Otherwise, the extra amount that you’d get would have to come from other investors.
The longer you keep your investment, the less likely it is that PAC will need to apply a
reduction. This is because the aim is to hold back some of the profits to pay a Final Bonus.
The profits held back build up over a number of years to provide a buffer that helps to
protect the fund against periods when investment performance is lower than had been
anticipated or during periods when there have been sharp falls in the stock market.
PAC constantly monitors investment conditions and the total amount of money being
moved out of the fund. It may apply a reduction at any time if this is necessary to help
protect the fund. If the extra amount being paid out is small, PAC may choose not to apply
the reduction at that time.
10
> How to contact us
We are here to help you at any time. To contact us, you can:
Write to:
Prudential International Assurance plc, Montague
House, Adelaide Road, Dublin 2, Ireland
Telephone on:
+ 353 1 476 5000 (9am – 5pm GMT Monday to Friday)
Calls may be monitored or recorded for quality, staff
training, dispute resolution and/or security purposes.
E-mail us at:
[email protected]
Full terms and conditions of Prudential International products are available on request.
11
The registered office of Prudential International is in Ireland at Montague House, Adelaide Road, Dublin 2. Prudential International is a marketing name of Prudential
International Assurance plc, a life assurance company operating from Ireland. Registration No. 209956. Telephone number + 353 1 476 5000. Prudential International
Assurance plc is authorised by the Central Bank of Ireland.
IPBB10133 09/2016
www.prudential-international.com