Out of the frying pan and into NPI's fire

Beleaguered investors in NPI can now claim a dubious distinction. The firm's with-profits bonds, sold by IFAs, top the life insurance industry's new league of shame. NPI, part of the troubled Australian-run AMP group, hits investors with the biggest "market value reduction" exit penalty if they want to cash in.

New figures from Money Marketing magazine show investors wanting out from NPI have to pay up to 36%. AMP says the figure is only 33% - but that is still one of the worst. At the other end of the table, Clerical Medical investors get away with a 7.5% penalty.

The survey shows bonds, endowments and pensions based on the with-profits concept which promised your money could only rise and gains would be locked in. Now most charge high exit penalties, other than at maturity or death.

And for at least one NPI investor, it was a case of out of the frying pan and into the fire. A London management consultant, who does not want her name published, decided in 2001 to stop payments into Equitable Life.

"I didn't want to throw good money after bad," she says. "I was 41 and did not want my money tied up until retirement. I had £17,000."

She went to London IFA Fiona Price & Partners. The adviser at first suggested she put £3,000 into zero bonds of split capital investment trusts with the balance into an NPI with-profits bonds. "I took fright at the zeros so I put the £17,000 into an NPI with-profits bond. At last count, my money was worth £12,197," she says.

She based her purchase decision on the Fiona Price recommendation that "one of the main advantages of a with-profits bond is that bonuses are added each year and become an integral part of your investment, and this gives you full security that you will retain the value of your capital over the years."

That, she believes, convinced her that her cash would always be intact.

But Donna Bradshaw at Fiona Price says this is a misreading. "This is true providing she does not cash in and this should have been explained elsewhere. She should have been told about penalties. She is confusing the full security the bond offers with the lower surrender value she will receive for early encashment. With-profits bonds offer a full value on death and, sometimes, at certain policy anniversaries."

A North Wales reader is also stuck with an NPI policy. She wanted to transfer her pension to Pearl, also part of AMP, but without success.

"NPI said there was nothing to worry about immediately but if I was concerned, I could transfer the funds," she says. AMP says there will be no market value reduction penalty if the NPI policy is encashed at her normal retirement age.

Pensions expert Tom McPhail at IFA Hargreaves Lansdown says pension holders in the AMP orbit - London Life as well as NPI and Pearl - should not panic.

"There are no short-term solvency issues. The issue with all three is what sort of investment returns you will get now they are to all intents and purposes out of equities and reliant on bonds, cash and property," he says. "What you should dodepends on your age and your attitude to markets. You should explore other options if retirement is still distant."

Here's our Q & A guide:

Are all the AMP companies in the same boat?
NPI, Pearl and London Life are all due to be demerged from AMP into a UK-based group. But there are variations.

Do they all apply MVR penalties?
No. NPI tops the table for exit penalties, with the biggest deductions for those who bought when the stock market was at its height in 1999-2000 and the least for those who bought before 1988 and in 1991. But London Life has no MVRs while Pearl only has MVRs on a small number of 1995 policies.

Can I still invest in these companies?
London Life and Pearl are closed funds and are being run down. Existing policyholders can continue to make contractual payments into regular payment plans but not add to policies. National Provident Life, the fund for policyholders who bought before the AMP takeover in 1999 is also closed. But NPI Life, the firm set up by AMP, will sell new products and take higher contributions.

Should I still invest?
AMP's deep-seated problems are confined to with-profits funds. NPI, Pearl and London Life now say they will ditch high risk equities in favour of bonds, cash and property. This should eliminate stock market and interest rate risks but cut out future growth. The move out of equities would be suitable for pension plan holders nearing retirement. But for those with at least five years to go, the risk is losing out on an equity bounce-back.

What about guarantees?
Pearl policies do not have guarantees. Many NPI pension plans offer a minimum 4% annual growth rate - better than many funds have produced. Some NPI and London Life policies have guaranteed annuities rates higher than current values.

Is the guarantee worth the paper it is printed on?
The move into safer investments and closing the funds should ensure assets match future guarantee liabilities.