Some investors are cashing in their policies, although this may not turn out to be the best course of action.
Friendly society policies are for a minimum of 10 years. L&Y does not pay any early-surrender values on policies started less than 12 months ago. From then on, its payments are governed by rules laid down under friendly society legislation, which allow policyholders to receive the lesser of the current value of their investments or the total value of premiums paid.
Since the maximum investment a friendly society tax-exempt policy can accept in a year is pounds 200, surrender values may be paltry.
Paul Brighton, marketing executive with the independent adviser Abbey National Financial Services, said: 'Investors are guaranteed to lose out if they surrender early. They will not necessarily lose if they sit tight.'
One Independent reader said he had been contemplating taking out policies for his three children, having already started policies for himself and his wife. L&Y is not taking on new business, so taking out new policies is not an option.
It will not take on new business again until its current problems are resolved. It is seeking court rulings to do this and it is likely to be months before the issues are sorted out.
The rulings could result in the society paying compensation to some policyholders, which could weaken its financial position. However, there is no suggestion that it is insolvent, and it is continuing to pay maturity values and death benefits as normal. Even if the compensation bill is large and the society does not want to reopen for new business, it could close its existing funds but run policies to their maturity dates. Another option is to seek a merger with another society.
A series of problems affect more than half L&Y's 70,000 policies. The society is under new management, which has vowed to seek a resolution to the difficulties.
L&Y started investing in properties about five years ago. The value of these investments has more than halved to pounds 2.5m. Fifty-three per cent of L&Y's policies were invested in property through its Capital Secure Fund but the policy details did not give specific permission for the money to be used this way.
The society needs a court ruling to see whether these policies are valid and whether it should compensate people for losses on the property investments.
Other investors could find that the proceeds of their L&Y policies will be liable to tax as a result of the way they have been set up. The society accepted lump sums from some policyholders and used these to pay regular contributions in its savings schemes. It is not clear whether L&Y was permitted to fund the policies this way.
L&Y's third problem was that it sold policies between October 1990 and 5 December 1991 whose terms had not been formally approved by the Registry of Friendly Societies. The tax-free status of these policies is also in doubt.
Friendly societies operate a voluntary compensation scheme. This will pay out 90 per cent of the sum assured under the policy - this is normally the minimum amount payable under the policy on death - plus any bonuses paid to date. However, it does not cover the value added to the minimum sum assured in a unit-linked policy. All L&Y's policies are unit-linked. Compensation would only be paid if the society was insolvent.Reuse content