More misery for with-profits investors

Worried man

Prudential has become the latest insurer to slash with-profits bonus rates amid continuing stockmarket turmoil. 

The “worst stockmarket conditions in 70 years” have led to with-profits funds losing between 6% and 10% of their value, says Prudential. It blames the sharp fall on the poor performance of the FTSE All-Share index, which plummeted by 29.9% during 2008.

With £2.8 billion added to policy values, Prudential says the ‘smoothing’ nature of with-profits funds has protected policyholders from feeling the full impact of the economic downturn.

With-profits funds use investors’ pooled money to invest in a mixture of equities, property and lower-risk investments such as gilts. By holding back some of the returns generated from ‘good years’, these funds are able to lessen the blow of ‘bad years’.

However, the chaos seen on the stockmarket has had a big impact on the value of with-profits funds. Legal & General, Norwich Union, Standard Life and Friends Provident have all announced falling with-profits fund value or reduced bonuses. Norwich Union has even backtracked on plans to redistribute to policyholders additional money built up in its funds.

Prudential says annual bonus rates will be 3% for most with-profit and personal pension policyholders, down from 3.5% last year. Prudential annuity customers will receive bonuses of 2%, down from 2.75% in 2008.
David Belsham, chief actuary at Prudential, says: “Investment markets have performed very poorly in 2008, [yet] our policyholders have been protected from the full impact of the market falls and will typically see a reduction of between 6% and 10% in their accumulating with-profits policy values.

“In such exceptional market conditions, this compares very well with many directly exposed investment options available to customers.”

Belsham adds that with-profits products are a medium to long-term investment.

Other insurers

Norwich Union: Last November, Norwich Union cut payouts to its 2.4 million with-profits customers with final bonus rates reduced by up to 10%. Regular bonus rates and market value reductions remained the same.

Legal & General: In October, Legal & General announced it was cutting final bonus rates by between 5% and 9%. No changes were made to regular bonus rates.

Standard Life: In January, Standard Life introduced market value reductions to its with-profits plans and raised existing ones by up to 30%.

Friends Provident: In January, Friends Provident slashed final bonuses on its with-profits funds by as much as 22.5%. It also reduced regular bonuses after the value of its with-profits fund fell by 10.5%. Market value reduction rates (MVRs) – the charge on people who leave the fund early – were increased to “reflect latest market conditions”.

Should you ditch your with-profits policy?

As more insurers announce falling values and slashed bonuses, many with-profits investors will be wondering whether to hang on to their investments or cut their losses and run.

Before deciding, you need to weigh up your options:

* “Check the surrender value and whether there are any penalties for leaving early,” advises Jason Witcombe, a director at Evolve Financial Planning.

* Some policies allow  surrender without a penalty on the anniversary of their start date.

* Ian Lowes, director of Lowes Financial planning, recommends that you check the second-hand market to see if you can sell your policy. Someone may be willing to pay more than the insurer but, if they are, you need to ask yourself whether the policy is worth surrendering.

* Most with-profits policies are made up of a terminal bonus paid out when the policy matures, so if you have 10 years or more left to run, it could be worth hanging on, says Lowes.

* By surrendering your policy early, you instantly lose any life insurance that you’ve been paying. If you are in poor health, this could be a problem especially because the replacement cost could be substantial.

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