Bonds that do not bind on rainy days

PEOPLE who bought with-profits bonds in the hope that the tempting returns offered by the insurance companies were guaranteed are in for a nasty shock, writes Sue Fieldman.

Insurance companies can reduce the surrender value of the bonds, and are doing so. They are using a device called a market value adjustment to avoid paying surrender values in excess of the value of the underlying assets.

Prudential has been cutting the surrender values for investors who withdraw more than pounds 25,000. A spokesman said: 'They differ according to when people withdraw. Our main concern is to protect the interests of the longer-term policyholders.'

Legal & General has also cut its surrender values. There is a sliding scale of cuts. The biggest surrender penalty of 11 per cent is on policies taken out in 1989.

A spokesman for L&G emphasised that they did not apply to investors taking out regular income. Eagle Star also does not penalise investors who take regular income from the bond.

However, Eagle Star has applied cuts of up to 10 per cent for investors who withdraw early.

Norwich Union has also adjusted its surrender values by using the MVA.

The insurers argue that the bonds are long-term investments and that they have to penalise early surrenders to protect the long-term policyholders.

The problem arises because investors were frequently lulled into a false sense of security that bonds were similar to building society accounts.