A with-profits pension invests your money in a pooled fund and pays smoothed returns through annual bonuses. The structure protects you from sharp market falls — but can also limit growth, and leaving early may trigger a market value reduction penalty.
With-Profits at a Glance
| Detail | |
|---|---|
| Investment approach | Pooled, managed by insurer — smoothed returns |
| Bonus types | Reversionary (annual, guaranteed once added) + Terminal (discretionary, paid at end) |
| Risk of leaving early | Market value reduction (MVR) — can be 15%–25% |
| MVR-free exit | Usually at the selected retirement date (maturity date) |
| Who offers them | Older traditional life insurance companies (Aviva, Prudential, Royal London, Standard Life legacy policies) |
| Modern equivalent | Unit-linked pension or SIPP with index fund investments |
How With-Profits Pensions Work
When you pay into a with-profits pension:
- Your premiums are pooled with thousands of other policyholders into a with-profits fund
- The insurer invests the fund across equities, bonds, property, and cash
- Each year, the insurer declares a reversionary bonus — added as a percentage to your accumulated policy value
- Once added, reversionary bonuses are guaranteed and cannot be removed
- When you retire (or transfer), a terminal bonus is calculated to reflect the fund’s actual performance — this is discretionary and can be substantial or zero
The smoothing mechanism means your pot value does not fall on the day markets crash. In exchange, you accept that in strong bull markets, you will not see the full upside immediately.
The Market Value Reduction (MVR) Problem
The biggest risk with a with-profits pension is the market value reduction (MVR).
An MVR is applied when the guaranteed value of bonuses (what you are entitled to) exceeds what the underlying fund assets are actually worth. It is a haircut on your pot value to prevent you — as a leaver — from taking more than your proportionate share of the fund.
Worked Example
Peter has a with-profits pension with a guaranteed policy value of £180,000. The insurer applies a 20% MVR because the fund’s assets are under pressure.
Peter’s transfer value = £180,000 × (1 – 0.20) = £144,000
Peter would lose £36,000 by transferring now. If he waits until his selected retirement date (his MVR-free date), he receives the full £180,000.
MVR-free windows typically apply:
- At the selected retirement date specified in the policy
- On the policyholder’s death
- Sometimes at critical illness
Should You Transfer Out?
There is no universal answer. Consider:
| Factor | Stay in with-profits | Transfer out |
|---|---|---|
| MVR applies now | ✅ Strong reason to wait | — |
| MVR-free date approaching | ✅ Wait for it | — |
| MVR-free date is far away | — | ✅ Consider alternatives |
| Bonus rates low (below 2%/year) | — | ✅ Poor long-term growth |
| Fund in run-off | — | ✅ Declining fund quality |
| You want investment control | — | ✅ SIPP / unit-linked better |
| You value smoothing / capital protection | ✅ Suits your risk appetite | — |
Key rule: Never transfer out solely because an adviser suggests it. Advisers earn trail commission or fees from recommended replacements. Check what the adviser is earning from the transfer recommendation.
How to Find Out What Your With-Profits Pension Is Worth
- Contact your provider and request a transfer value illustration — this shows the current value with and without any MVR
- Ask specifically: “Is there an MVR on my policy, and what is my MVR-free date?”
- Request your projected retirement value at your selected retirement date
- Compare this with what you could achieve by transferring to a low-cost SIPP (after charges)
Tracing Old With-Profits Policies
Many with-profits pensions are held with companies that have been acquired, merged, or renamed. If you have lost track of an old policy:
- Use the government’s Pension Tracing Service at gov.uk/find-pension-contact-details
- Check the Association of British Insurers (ABI) for firm name changes
Old policies from the 1980s and 1990s may have guaranteed annuity rates (GARs) that are highly valuable — always check before transferring, as GARs are lost on transfer.
See our pension consolidation guide, defined benefit early retirement guide, and SIPP guide.