Bonus prospects look bleak

Endowment policy investors may need to rethink their strategy, reports Jenne Mannion

Equity markets have recovered but the picture remains bleak for holders of long-term endowment policies. Norwich Union - Britain's largest insurer - announced this week that it would slash the annual payouts on policies taken out more than 15 years ago, despite its £57bn fund making an 11.5 per cent gain over 2004. The group said a 25-year, £50-a-month mortgage endowment policy would pay £52,576, compared with £59,444 last year. A 20-year, £200-a-month pension would have fallen to £113,392, from £120,978 last year.

Equity markets have recovered but the picture remains bleak for holders of long-term endowment policies. Norwich Union - Britain's largest insurer - announced this week that it would slash the annual payouts on policies taken out more than 15 years ago, despite its £57bn fund making an 11.5 per cent gain over 2004. The group said a 25-year, £50-a-month mortgage endowment policy would pay £52,576, compared with £59,444 last year. A 20-year, £200-a-month pension would have fallen to £113,392, from £120,978 last year.

Earlier this month, Axa announced it would cut regular bonus payments on with-profit policies taken over as part of its Equity & Law acquisition. Although the group paid 2 per cent bonuses in 2004, these have recently been cut to 1 per cent. These cuts confirmed predictions that payouts would continue to fall for many years, though industry commentators said these were not as severe as initially expected.

There was also some good news from Norwich Union in that it would maintain regular bonus rates for newer policies. And Prudential kicked off the bonus season early, in mid-December, by announcing it would maintain the 3.25 per cent bonus on its Prudence Bond for the third consecutive year.

While the picture has been slightly better for shorter-term policyholders, financial experts do not expect further improvement, even if equity markets remain stable. Certainly, industry commentators are warning that policyholders should not expect to see a return of the high bonuses seen in the 1990s.

Sharp declines in the stock market from March 2000 onwards and continuing low yields on gilt-edged stocks meant many groups had to slash bonuses on with-profits funds, which are designed to smooth out the peaks and troughs of stock market volatility.

These problems were exacerbated by life companies' forced selling of equities over 2002 and 2003 (when the market was at its lowest levels) in order to meet the Financial Services Authority's strict solvency requirements.

The Actuarial Professions Life Board expects there will be lower payouts for several years to come, reflecting lower returns from stock markets and other investments around the world. Nigel Masters, chairman of the board, said: "Investment returns are not expected to reach the high levels of the 1980s and 1990s in the near future, and payouts from with-profits policies can be expected to continue falling until the policies affected by the good returns of those earlier decades have all matured. Customers with policies of 10 years' duration or less may have already seen the worst of the falls, but payouts from longer-term polices are likely to continue to fall for several years yet."

Patrick Connolly, an independent financial adviser at John Scott & Partners, based in Marlow, said longer-term policies will continue to suffer because markets are not returning as much as they have previously. For instance, the investment return from 1979 to 2004 was lower than the return from 1978 to 2003, simply because there is one better year balanced into the equation. This will result in further cuts to 25-year endowment policies.

Mr Connolly said although some providers are better than others (he cites Prudential, Norwich Union, Legal & General, Liverpool Victoria, and Standard Life), with-profits funds have bleak prospects.

He expects new investors can achieve better returns from their money by avoiding with-profits. For existing investors, whether to sell or stay put should be considered on a case-by-case basis. "Existing policyholders should consider the individual terms of their policies, whether there are any penalties, guarantees, and their own individual tax position," Mr Connolly said.

The main disincentive for selling has been the Market Value Reductions (MVRs). Most policies sold in recent years would impose an MVR. Tim Whiting, an independent financial adviser at Best Invest, London, said before deciding to sell a with-profits fund that imposes an MVR, you should check to see if there are any ways you can mitigate your loss. With some bonds, there are specified dates on which MVRs will not apply. Mr Whiting said if one of these dates is looming, it is probably worth waiting for. If this option is not available - and the MVR is steep - you can consider making regular withdrawals of the maximum amount permitted before the MVR is applied, which can be up to 7.5 per cent per annum.

Taxation should also be considered. Mr Whiting said withdrawals of more than 5 per cent per annum cumulatively, or surrenders, could be subject to income tax, even if you have not made a positive overall gain.

What are the alternatives for new clients or those who believe it is viable to replace their existing policy? Darius McDermott, an independent financial adviser at Chelsea Financial Services, based in London, said for those wanting a life contract, a distribution fund is a better option than with-profits. He said distribution bonds are more transparent than with-profits and, importantly, distribute all of the income you are entitled to.

Alternatively, you could construct your own portfolio of unit trusts, with a plethora of equity, fixed-income and commercial property funds to choose from, Mr McDermott added. This latter option is the preferred route for John Scott & Partners. Mr Connolly does not believe packaged products such as with-profits or distribution funds, where one provider has responsibility for managing different asset classes, can produce the best returns.

Mr Connolly believes the sensible approach for investors is an appropriate asset-allocation strategy to meet their requirements. The best providers can then manage the underlying investments. "We choose the best equity managers to manage the equity portion of portfolios, and the best fixed-interest managers to manage the fixed-interest portion," he said.

'I don't like risk; this was a good option'

While many people are disillusioned with their with-profits policies, Jennifer Baker, 62, has benefited from good timing.

A retired potato packer who lives with her partner Alan Formoy in Spalding, Lincs, Jennifer loves gardening and has a quarter-acre plot. Her policy has grown, too. In 2001 she invested £20,000 in Norwich Unions' with-profits bond, using the proceeds from another NU policy. Since 2001 her policy has grown to be £22,367.

"I am a very cautious investor and was not prepared to take risks. Therefore, a with-profit policy which smoothes out stock market peaks and troughs seemed like a good option," she says.

Although there are penalties if she sells within five years, this is not a problem. "This was always intended as a longer-term investment. I don't need the money so I don't see that as a disadvantage," she says.

At the five-year mark, she plans to review her situation and may consider encashing the bond then, depending on her needs.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Suggested Topics
Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm today
News
people
News
Elton John and David Furnish exchange marriage vows
peopleSinger posts pictures of nuptials throughout the day
News
File: James Woods attends the 52nd New York Film Festival at Walter Reade Theater on September 27, 2014
peopleActor was tweeting in wake of NYPD police shooting
PROMOTED VIDEO
Sport
Martin Skrtel heads in the dramatic equaliser
SPORTLiverpool vs Arsenal match report: Bandaged Martin Skrtel heads home in the 97th-minute
News
people
News
Billie Whitelaw was best known for her close collaboration with playwright Samuel Beckett, here performing in a Beckett Trilogy at The Riverside Studios, Hammersmith
people'Omen' star was best known for stage work with Samuel Beckett
Arts and Entertainment
Mark Wright has won The Apprentice 2014
tvThe Apprentice 2014 final
News
i100
Arts and Entertainment
Darrell Banks’s ‘Open The Door To Your Heart’
music
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    SThree: Graduate Recruitment Consultant

    £20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K - £45K: SThree: SThree Group have been we...

    Day In a Page

    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all
    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
    The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

    The 12 ways of Christmas

    We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
    Birdwatching men have a lot in common with their feathered friends, new study shows

    The male exhibits strange behaviour

    A new study shows that birdwatching men have a lot in common with their feathered friends...
    Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

    Famous diaries: Christmas week in history

    Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
    From noble to narky, the fall of the open letter

    From noble to narky, the fall of the open letter

    The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
    A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

    A Christmas ghost story by Alison Moore

    The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'