Friends Provident slashes bonuses

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Friends Provident yesterday became the latest insurer to slash payouts on with-profits policies which mature this year, joining other rivals whose reserves have fallen with the stock market.

A policyholder whose 25-year endowment matures this year will receive £81,936 – 12 per cent less than if the policy had come to an end last year. This is based on a man who started the policy aged 30 and saved £50 a month.

The cuts may mean some Friends Provident policyholders whose endowments were in line to pay off their mortgages may not now do so. The company said it would update projections in November.

Friends follows CGNU and Scottish Widows in announcing bonus cuts. CGNU slashed its maturity payouts by 10 per cent and also reduced annual bonuses on policies still in force. Scottish Widows made cuts of up to 33 per cent in annual bonuses.

Further announcements of cuts are expected, with Prudential, Legal & General, Royal & SunAlliance and Standard Life all still to unveil bonuses for this year. Most insurers are reducing bonuses after a 16 per cent drop in the FTSE 100 last year, which left the vast majority with negative investment returns.

Yet most insurers offering with-profits policies have still declared bonuses this year, because the structure of the products means the company holds back some of the real investment return in good years to make up in part for bad years.

Historically, with-profits policies have returned about 15 per cent a year. But most companies realise that policyholders will have to get used to the fact returns in the next decade will be much lower, and many annual bonuses this year are hovering around the 4 per cent mark.

A Friends Provident spokesperson said: "In an era of low inflation, the expectation for the future is that long-term investment returns will remain much lower in nominal terms than those in previous decades."

Friends Provident made no changes to its annual bonus rates on unitised with-profits policies – the most popular type – but said it would review them in March. Its shares fell 0.5p to 206p.

The company, which was set up by teachers as a Quaker School, ended 169 years of mutual ownership when it sold shares to the public in July.