CU cuts bonus rate against the trend: Payouts reduced because of low inflation and interest rates, but company remains a top payer

COMMERCIAL UNION has cut its bonus rates because it believes that in the current low inflation and low interest rate environment investment returns will fall.

Most of the other big life offices which have declared their bonuses so far have maintained rates.

The bonus has been cut from an annual rate of 4.5 per cent plus 6.5 per cent of attaching bonuses to 4 per cent plus 6 per cent.

However, the payout on a 25-year Commercial Union policy remains one of the highest. For a pounds 50-a- month policy taken out by a 29- year-old man at outset the payout is pounds 109,620, up 4.2 per cent on last year's pounds 105,199.

This represents a return to investors of 13.6 per cent and is the second highest payout of those companies that have declared so far. Only General Accident has a bigger 25- year payout at pounds 110,639.

Last year Commercial Union was one of the top-paying life offices.

Ian Reynolds, general manager (life), said: 'If the current low interest rates and low level of inflation continue, future bonus declarations of all companies would be affected.'

Commercial Union emphasises that, in spite of anticipated decreases in investment returns, the yields on its policies represent a high rate of return when compared with inflation.

In line with all the companies declaring bonuses so far, Commercial Union has cut the payouts on the pounds 50m worth of 10-year policies maturing this year from pounds 12,108 to pounds 11,505.

The decrease in payout of 5 per cent represents a drop in return of 1 per cent to 12.5 per cent.

Commercial Union expects the yield on these shorter-term policies to fall by 3 per cent over the next two to three years.

Mr Reynolds said: 'Real rates of return above inflation are important to savers. We have achieved rates of 7.5 per cent and 4.5 per cent above inflation for 10-year and 25-year policies respectively.'

GRE is maintaining its bonus rates at 4.5 per cent and has increased payouts for 25-year policies marginally from pounds 73,610 to pounds 74,139. GRE's payout is pounds 36,062 less than the top performer, General Accident. GRE has also cut payouts on 10-year policies by 1.9 per cent to pounds 8,369.

The cut in the payout on 10-year policies will hit many people who raced to buy life policies in 1984 before the abolition of tax relief on life insurance premiums.

Many life companies are anticipating higher maturity payouts than normal because of the massive increase in sales of these policies 10 years ago.

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