With-profits funds and market value reductions

A with-profits fund is a type of investment which pools all investors' money together¹. It is usually found inside products sold by insurers, such as investment bonds, endowments and some pensions, and it is classed as a low to medium risk fund¹. Instead of passing market movements straight through to you, the fund declares bonuses: returns are added to your plan in instalments rather than rising and falling day to day with the markets.

The trade-off for that steadier ride is a mechanism called a market value reduction, or MVR. If investment markets have fallen, or fallen hard, a provider may reduce what it pays out when you take money out of the fund, so that the amount reflects the falls in investment values². Some companies call them market value adjustments, or MVAs³. This page explains how the bonuses work, when an MVR can be applied, when it cannot, and what to check before cashing in or transferring a with-profits policy.

Bonuses: annual, interim and final

A with-profits plan grows through bonuses rather than through a unit price that moves every day. Healthy Investment sets out the three types: "There are three types of bonus, Annual, Interim and Final, and all are important."²

An annual bonus is added once a year and, once added, forms part of the plan's value. Interim bonuses work in a similar way but are declared between annual bonus dates, so that someone cashing in partway through a year does not lose the growth built up since the last annual bonus. A final bonus is paid when the plan comes to an end, or when money is taken out, and its size depends on how the fund has performed over the whole time the money has been invested. It is not guaranteed in advance.

The order matters when you are thinking of moving your money. With-profits funds may pay an extra payment after a certain date, typically called a terminal bonus, and this could be lost on transfer. A final bonus that would have been paid at maturity may simply never arrive if you leave before that date, and no other provider will make it up.

Bonuses are not the same thing as interest on a savings account. They depend on how the underlying investments have performed and on how much the provider has held back for smoothing, so they can be small or nil in a poor year. Nothing in the with-profits structure guarantees a bonus every year.

Smoothing holds back returns in good years to support bad ones

Smoothing is the defining feature of a with-profits fund. Healthy Investment describes it this way: the fund achieves steadier returns by "smoothing" the amount of annual return, "where some of the returns are retained in periods of good investment returns and applied during periods when investment returns are not as good"².

In practice, the provider holds back part of the gains in strong years rather than declaring them all as bonus. That held-back money is then used to keep bonuses going in years when the markets fall or stagnate. The result is that your plan value tends to move up and down less sharply than the underlying investments. Aviva says it evens out the variations in performance by smoothing the bonus rates that apply, and typically does this twice a year¹.

Smoothing has a consequence worth understanding before you cash in. Because some of your good years' returns are sitting in the fund rather than in your plan value, the amount shown on your plan, including bonuses, can be more than the assets actually backing it. That gap is what a market value reduction addresses, and it is covered later on this page. The International Longevity Centre has pointed to with-profits funds as investment vehicles which pool risk across generations⁴, which is another way of saying the same thing: money held back from one generation of investors supports the payouts to another.

Conventional and unitised with-profits policies

Aviva explains that "there are two types of with-profits policies: conventional and unitised policies."¹

A conventional with-profits policy is the older form. The provider promises a basic sum assured plus bonuses, and the bonuses are declared in cash amounts. Your plan documents show a guaranteed amount plus the bonuses added so far, and the final bonus tops it up at the end.

A unitised with-profits policy works through units, like other investment funds. Your money buys units in the with-profits fund, and the unit price rises as bonuses are added. Scottish Friendly describes the MVR in exactly these terms: it is "an adjustment to the value of a Unitised With-Profits plan when money is taken out and the value of the underlying assets is less than the value of the plan including all bonuses"³. So the unitised form is where the MVR bites most directly: your unit count times the unit price can exceed what the assets are worth, and the provider adjusts the payout down.

Both forms share the same underlying idea, a pooled fund with smoothed bonuses, and both can be held inside products such as investment bonds and endowment policies. Which form you have affects how your statement reads and how an MVR is calculated, but not whether one can apply.

Charges on with-profits investments

With-profits funds charge for managing your money, and the way those charges appear is different from ordinary investment funds. Because bonuses are declared net of everything, the charges are often not shown as a separate percentage deducted from your plan. They are taken inside the fund before bonuses are worked out.

Where a with-profits fund sits inside a stakeholder pension, the law caps what can be taken. The stakeholder pension regulations provide that the value of a member's rights in a with-profits fund may be reduced by deductions "no greater than 1/365 per cent. of the value of the member's rights in the fund for each day on which it is held"⁵. The same regulations require the insurance company to provide the trustees or manager of the stakeholder pension scheme, at least annually, with a certificate from the auditor to the insurance company or the appointed actuary⁵. Equivalent provisions apply in Northern Ireland⁶.

Outside stakeholder pensions, there is no single statutory cap of this kind, and charges vary by provider and product. Royal London's Platinum Bond Plus, for example, invests money into its with-profits fund, and the charges for that plan are set out in its own key document⁷. Aviva notes that the MVR free guarantee on certain pensions is paid for through the charges that apply to the with-profits fund, which may mean the charge is higher than for other investment funds¹. Guarantees inside a with-profits product are rarely free: they are funded by the charges everyone in the fund pays.

If your with-profits investment sits inside a pension you are drawing an income from, other costs stack on top. Which? notes that with pension drawdown "you'll have to pay charges on the investments you hold, as well as those levied by your drawdown provider"⁸. The general rules on fund charges and the ongoing charges figure explain how costs are disclosed for ordinary funds, but with-profits charges are often visible only in the provider's own plan documents.

What is a market value reduction?

A market value reduction is a cut the provider makes to the amount it pays out when you take money out of a with-profits fund, at a time when the assets behind the plan are worth less than the plan's value including bonuses. Healthy Investment puts it plainly: "In adverse market conditions we may apply a market value reduction to a bond or ISA which will reduce the amount you receive to reflect the falls in investment values."²

The reason the mechanism exists is fairness between the people left in the fund and the person leaving. Aviva states that "a Market Value Reduction is applied to protect those customers that remain invested in the fund"¹. Without it, someone cashing in after a market fall would take out more than their share of the shrunken fund, and the loss would be spread across everyone who stayed.

Aviva describes when it bites: it may need to introduce a market value reduction "in certain circumstances when a customer moves their money out of with-profits, for example, following a sudden large or prolonged fall in investment markets"¹. Scottish Friendly adds that the MVR amount depends on the total value of your plan, including any bonuses, and how well the with-profits fund has performed since you invested in it³.

Scottish Friendly calculates the MVR separately for each withdrawal, and it changes over time³. It is not a fixed penalty written into your plan at the outset: it is a variable adjustment that reflects the gap between your plan value and the assets behind it at the moment you leave. Scottish Friendly also gives a promise worth noting: it will not use MVRs to make anyone's investment worth less than the value of the assets underlying the plan³. The reduction takes you down to what the assets are worth, not below.

When an MVR can and cannot be applied

An MVR can be applied when you cash in a bond, make a withdrawal, or transfer a with-profits pension to another type of plan. The Financial Ombudsman Service lists this among the common issues it sees in pension transfer complaints, noting that pensions providers apply a market value adjustment when with-profits pension funds are transferred to another type of plan⁹.

There are also firm situations where providers say an MVR will not be applied:

• Death. Healthy Investment states that "MVRs are never applied in the event of the death of an investor or on Tax Exempt or Standard Savings Plans."² Aviva likewise says a market value reduction is not applied on death or where specific guarantees apply¹, and Scottish Friendly promises not to apply one if the planholder passes away, for plans where this applies³.
• Retirement dates on pensions. Scottish Friendly will not apply an MVR at the chosen or normal retirement date, as specified in the pension plan information, or at the anticipated annuitisation age for relevant income drawdown plans³. Aviva notes that certain pensions have an MVR free guarantee so the MVR does not apply on the customer's selected retirement date¹.
• Maturity on endowments. Scottish Friendly states that for endowment plans, it will not apply an MVR when the plan reaches maturity³.

One further point on how the rules can move: Scottish Friendly states that "we might change our MVR rules at any time without telling you first," and that changes can affect plans already set up as well as new ones³. The exclusions above are provider commitments and plan terms, not statutory rights, so the documents for your own plan are the ones that count.

An MVR can mean getting back less than you paid in

A market value reduction is not a token deduction. Because it closes the whole gap between your plan value and the assets behind it, it can take a cash-in figure below the amount you originally invested. That is the point of the mechanism: the provider is saying the money is not there to pay the full plan value.

Royal London's terms for its with-profits bond show the test providers apply. It states that "in certain circumstances when you cash in your Bond, we may reduce the cash-in value if it is greater than your fair share of the with-profits fund"⁷. Your fair share is measured by what the underlying assets are worth, not by what your statement says.

An MVR can also arrive stacked on other costs. Scottish Friendly is explicit: "If we do take out an MVR, it'll be on top of any other charges, like an early cash-in charge, that might apply."³ Early exit charges are common on products that hold with-profits funds. Which? makes the same point about equity release products meeting the same kind of standards, noting that repaying your loan early often triggers an early repayment charge¹⁰. So a withdrawal in the early years of a plan could lose money three ways at once: an early exit charge, an MVR, and the loss of a final bonus that would otherwise have been paid later.

Royal London's Platinum Bond Plus illustrates the shape of these products: a lump sum investment designed to grow over the medium to long term, typically at least five years, which can also provide an income of up to 5% per annum of the original capital invested without immediate tax liability, until total income taken equals the original capital⁷. You can cash in part or all of the bond at any time, but withdrawals reduce the overall value, and the MVR may be applied if the cash-in value is greater than your fair share of the fund⁷.

Who oversees with-profits funds and the annual report to policyholders

With-profits funds sit inside insurers and pension providers, and the rules that govern them come from the Financial Conduct Authority, which regulates financial services firms in the UK, including those who provide financial advice regarding pensions and Self Invested Personal Pensions¹¹. The Financial Ombudsman Service describes the FCA as the financial services regulator and handles complaints about firms it regulates¹².

Providers also publish an annual report on how they have run their with-profits fund. NFU Mutual's Board published its Report to With-Profits Policyholders for 2025 in May 2026¹³. Zurich publishes an annual report on compliance with its principles and practices of financial management, last published in June 2026 with the next issue due June 2027¹⁴. These reports are where a policyholder can see how bonuses were set, how smoothing was applied and whether any MVRs were in force during the year.

Funds can also change or close. From October 2026, Phoenix Life is closing its Britannic Industrial Branch Fund and moving policies to the Phoenix Life Non-Profit Fund, with with-profits policies becoming non-profit with fixed and guaranteed future bonuses; letters to affected customers were being sent throughout June 2026¹⁵. If you hold a with-profits policy that is being changed in this way, the letter from your provider is the place to find what it means for your bonuses and your right to cash in.

If something goes wrong, complaints go first to the provider and then to the Financial Ombudsman Service, which deals with complaints about pension transfers from personal pension arrangements, including cases where a market value adjustment was applied⁹.

Before you cash in or transfer a with-profits policy

Before moving money out of a with-profits fund, there are four things to check, because each can change what you receive.

1. Ask for a current cash-in or transfer value, and whether an MVR applies. Healthy Investment states that "if we do have to apply a market value reduction we'll always tell you before you make a withdrawal"². Ask for the figure in writing, with and without any reduction.
2. Check what final or terminal bonus you would lose. With-profits funds may pay an extra payment after a certain date, typically called a terminal bonus, and this could be lost on transfer. The value you get by leaving may be materially lower than the value shown on your statement.
3. Check for early exit charges. An MVR is applied on top of any other charges, like an early cash-in charge³, so both need to be quantified together.
4. Check the exclusions that apply to your plan. Death, retirement dates and endowment maturity are the common ones², but they depend on your plan's own terms, and providers can change their MVR rules at any time without telling you first³.

For pensions, transferring out of a with-profits fund is a decision with long-term consequences: if you transfer out before your agreed retirement date, you may lose your guarantee, and switching or cashing in before the specified length of time loses the minimum guaranteed return. The general pages on pensions and on investment funds cover the wider choices. If you were advised to move out of a with-profits fund and believe that advice was wrong, the page on mis-sold investments and bad investment advice explains how to complain.