Friends Prov slashes with-profit bonuses
Friends Provident has slashed final bonuses on its with-profit funds by as much as 22.5% after experiencing what it terms a “challenging year”.
The insurer has also slashed regular bonuses after the return on its with-profits fund fell by 10.5%.
Andy Carr, chief actuary at Friends Provident, says: “To ensure that we are fair to all customers, we have reviewed regular bonus rates to target an appropriate balance between the guaranteed portion and the total level of benefits.”
Market value reduction rates (MVRs) – the charge on people who leave the fund early - have also been increased to “reflect latest market conditions”.
Carr says: “MVRs have also been adjusted to ensure fairness between customers surrendering and those who remain invested in the fund. We needed to reduce bonus rates to reflect the fall in underlying investment values.”
Nigel Callaghan, annuity analyst at Hargreaves Lansdown, says: “This is one of the worst bonus announcements I have ever seen. The outlook for Friends Provident with-profit policyholders is poor.”
Callaghan says although the 10% fall in returns isn’t too bad, the fact that 16% of the fund is invested in real assets, such as equities and property, means it is not positioned to be able to ever recover.
With-profits funds are administered by life assurance companies and access to them is through the life company’s products such as bonds, endowments and pensions. Your monthly contributions are pooled with other investors’ money and invested in a mixture of shares, bonds, property and cash. Each year, a “reversionary” bonus (a declared percentage) is added to your investment and a large part of the policy’s final value depends on these bonuses during the investment period. In years when the with-profits fund performs well, some of the return is held back and paid out in years when the fund does badly and this “smoothing” process makes with-profits investments unique. When the policy matures, the life company may pay a discretionary “terminal bonus”.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.