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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