3 Why are annual bonus rates so low and when might you increase them?

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1 With-profits policy performance your questions answered January 2015 PHOENIX LIFE LIMITED NPI WITH-PROFITS FUND WITH-PROFITS INVESTMENT BONDS This leaflet aims to answer questions that are often asked about the performance of NPI with-profits investment bonds like yours, which are invested in the Phoenix Life Limited NPI With-Profits Fund ( the fund ). It applies to policies issued by NPI Limited after 1 January It also applies to Portfolio Bonds issued by NPI in the second half of The NPI with-profits investment bonds transferred from NPI Limited to the Phoenix Life Limited NPI With-Profits Fund in March If you have made more than one investment into your bond, the information in this leaflet applies separately to each investment as if it was a stand-alone bond which commenced on the day the investment was made. 1 How does my with-profits policy work? We have produced a guide to explain this. It is called How we manage the Phoenix Life Limited NPI With-Profits Fund: A guide for policyholders with unitised with-profits policies. We refer to this as the guide. The guide is available on here or you can ask us for a copy. We recommend that you read the guide before reading the rest of this leaflet, as it will help you understand some of the terms we use. 2 How do you work out bonus rates? We answer this question in the guide. However, you may find the following explanation helpful. We aim to add bonuses to your policy so that its value reflects the profits we have made whilst investing your money, less the costs of selling and running the policy. We can do this by adding annual bonuses, which increase the price of your units daily, or by adding final bonuses, which increase the value of your units when your policy pays out. When investment market performance has been poor, there would almost certainly be times when we have added more in annual bonuses than we had earned on our investments. So when investment markets perform better we aim to add annual bonuses at a lower rate than the actual returns received to make it less likely that the value of your units will be more than the growth of your original investment during the life of your policy.

2 If your original investment has grown to more than the value of your units when it is surrendered (cashed in), we will add a final bonus to your payout. Figure 1 shows this. 3 Why are annual bonus rates so low and when might you increase them? Annual bonus rates have been low in recent years because, for most policies, the value of units has increased by more than the investment returns and other profits which we have earned after allowing for our expenses. Figure 2, which may be compared with Figure 1, shows the actual progress of the original investment for a policy which started on 1 January You can see that the value of the investment is currently less than the value of units. As this is also the case for policies issued on most other dates, we do not expect to be able to increase annual bonus rates for a number of years. However, for policies where the growth of the original investment is larger than the current value of units we will normally add a final bonus to your payout. 4 Why have your investment returns and other profits been lower than expected in recent years? The main source of profit for with-profits policies is investment performance. Over the last five to ten years, the with-profits fund s investments have not performed as well as they have historically. This remains the main reason for reductions in payouts and low annual bonus rates. There were significant falls in the stock market between 2000 and During this period, we reduced the amount invested in shares and property from just over 70% to around 25% of the fund. We did this to protect policyholders and safeguard our ability to pay the guaranteed amounts on policies. The majority of the with-profits fund investments were then held in fixed interest securities (bonds or loans issued by governments or companies). These are generally more stable than equities or property but on average give lower returns. The current target is 35% to 55% in equity type investments. Although markets have recovered, the investment returns overall have been insufficient to start increasing annual bonuses for most policies. We can pay bonuses only if our total profits allow. The profits do not just come from our investments but reflect the profits (and losses) of all of the policies in the with-profits fund. For example, we have in the past had to set money aside to pay the guaranteed sums assured and past annual bonuses which were, with hindsight, not always justified by the profits earned. This has reduced our overall profits, and our ability to pay annual bonuses. 5 What is a market value reduction (MVR) and how do you calculate it? 2

3 There may be times when, looking back, we have not earned as much profit over a period as we needed to be able to add annual bonuses at the rates we did. This is currently the case for some policies. For such policies, we will usually reduce the amount we would pay if the policy is surrendered (cashed in) so that we only pay out the profits we have actually earned. It would be unfair to the policyholders remaining in the with-profits fund if we paid some policyholders more than we had earned, as this would mean that other policyholders receive less than was due to them. This reduction is called a market value reduction (MVR), because it is usually applied when the value of the original investment is lower than the value of units. It is shown by the arrow in Figure 3. 6 When does a market value reduction (MVR) NOT apply? Market value reductions do not apply when a policy pays out on the policyholder s death. For some policies market value reductions do not apply to regular withdrawals up to certain limits where you surrender (cash in) an agreed quantity of your units at fixed intervals to provide you with an income. See your policy documents for details that apply to your policy. 7 If I keep my policy going, can I expect the market value reduction (MVR) to get less? The size of future market value reductions (or final bonuses) will vary depending on the profits of the withprofits fund. We aim to reduce the size of, and need for, market value reductions in the longer term by continuing to limit the rate at which we add annual bonuses. However, any periods of poor investment performance will result in an increase to market value reductions to ensure the fair treatment of all withprofits policyholders. 8 Will I get any final bonus when my policy pays out? As we explain in the guide, we aim to pay you a fair share of the profits the with-profits fund has earned over the time you have had your policy. If this fair share allows us to pay more than the value of your units, a final bonus will be added when your policy pays out. The example in question 2 illustrates this. Currently very few policies are receiving a final bonus. Whether or not you will receive a final bonus depends on when you took your policy out and when it is surrendered (cashed in) and the investment performance over this period. 9 Should I keep my policy going or stop it now? You can surrender (cash-in) your policy at any time. Some things you may want to take into account when considering whether to surrender your policy include: whether you could earn a better return on the surrender proceeds if you invest them elsewhere, taking into account the minimum we guarantee to pay at the guarantee date if this is still to come; and whether surrendering your policy would help you repay expensive borrowings. 3

4 We recommend that you speak with your financial adviser before surrendering your policy. If you do not have a financial adviser and would like help in finding one, please contact our Customer Care Team on What is my policy invested in? We currently (as at 1 January 2015) invest your policy s premiums mainly in a mix of equities (company shares), commercial property and fixed interest stocks (bonds) (types of loan issued by the government or by companies). The exact mix depends on your policy type. Equities and property can vary in value more than fixed interest stocks and are generally expected to produce higher returns over the long term. As at 1 January 2015, policies are invested approximately 41.4% in equities, 7.8% in property, 36.4% in fixed interest stocks and 14.4% in cash deposits and other investments. We may change the asset mix from time to time if we consider that this is likely to be in the best interest of our policyholders. 11 How does this investment strategy compare with other companies with-profits funds? Other with-profits funds invest largely in the same types of investments as we do, but may have more exposure to higher risk investments such as company shares (equities) and property (land & buildings) which are expected to provide a higher return in the medium to long term. The way a with-profits fund is invested will depend on a number of factors, including the current financial position of the fund and the company s view of the prospects for each type of investment. With-profits funds with a large excess of money over the amount needed to pay out guaranteed benefits to current policyholders can hold more assets which may fall in value, as they can make up any falls using the excess money. We do not have significant excess money over the amount needed to pay out guaranteed benefits in the with-profits fund, and the proportions invested in equities reflect this. 12 What return has been earned on the investments underlying policies in the past, and what do you expect to earn in the future? Figure 4 shows the returns earned (after tax) each year since 2008 for a with-profits bond issued on 1 January The investment return (after tax) earned for policies in 2014 was 7.8%, in 2013 this was 6.2%, and in 2012 this was 7.2%. These investment returns are not the same as the rate of annual bonus added to policies in each year. Please see question 2 to see how we work out bonus rates. Our view is that the future will be one of continuing low inflation and low investment returns. It is generally thought unlikely that the high return on equities (company shares) seen in the 1990s will repeat. 4

5 13 I have been drawing a regular income from my policy since it started. Why has the value of my policy reduced so much? The profits earned by the with-profits fund have not been enough to enable us to add enough annual bonuses to make up for the amounts withdrawn from your policy. See also question 2. If you want to preserve more of your capital, you could consider reducing the amount of income you withdraw. However, some regular income withdrawals can be market value reduction (MVR) free (see questions 5 and 6) so you should check your policy s terms and conditions. 14 What does Phoenix Group get from my policy? Phoenix Life Limited is one of the life companies within the Phoenix group of companies (Phoenix Group). Phoenix Group does not receive anything in respect of the value of the bonuses added to with-profits bonds. Our policies are administered by other companies within Phoenix Group. If these companies carry out their responsibilities for less than the fees we pay them, for instance through the annual management charge deducted from these policies, this would result in additional profit for Phoenix Group. Phoenix Group pays its own directors and shareholders out of its profits from all sources, of which the payments described above form only a small part. 15 Would I have been better off investing in a bank or building society account? Whenever you have some money to invest, you have to decide which way to do this; for example a bank or building society account or a stock market investment. You might choose to invest your money in a safe but steady way or in a way which offers the possibility of a higher return but with a chance that it would not perform so well or even lose you money. No one can say with certainty in advance which types of investments will do better than others. Some of our with-profits bonds may have unfortunately not done as well as investing in the average building society account. 16 How do I obtain further information? Versions of this leaflet may be available for other types of with-profits policy and for the policies of other life companies within the group. If this leaflet has not answered your questions we will be happy to help you further. Please contact us here. You can also find the latest information such as final bonus rates and how these are calculated, how the fund is invested and investment returns here. The information in this leaflet was correct as at 1 January QA_NPI_2015 Phoenix Life Limited No and Phoenix Life Assurance Limited No.1419 are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. All companies are registered in England and have their registered office at: 1 Wythall Green Way, Wythall, Birmingham, B47 6WG. 5