Standard Life slashes payouts on with-profits policies by 9 per cent

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Standard Life, one of the bastions of the life assurance industry, yesterday broke with tradition and slashed its payouts on with-profits policies, blaming the tough market conditions of the past 12 months.

The Edinburgh-based organisation said the average payout on a 25-year with-profit endowment would be 9 per cent less this year than if the policy had matured in 2001.

Standard Life has also reduced annual bonuses on with-profits policies which are still in force, with payouts on life insurance policies coming down from 4.5 per cent to 4 per cent and pension bonuses dropping from 5.5 per cent to 5 per cent.

The reductions reflect the pressure which all life offices are under after the 16 per cent fall in the FTSE 100 last year. Standard Life has been able to hold out until now because its greater financial strength enabled it to make up the shortfalls from its reserves for its 2.1 million with-profits customers.

Standard Life pointed out that with-profit customers will still receive a positive return because the purpose of this type of policy is to hold back some of the return in a good year to make up in part for a bad year.

Standard Life's research shows that a customer who took out a unit trust invested in the stock market in January 1991 and cashed it in in January 2001 would receive £11,366 on average, whereas a with-profit policy over the period would pay out £10,596. But a with-profit policy would have done better if taken out in 1992 and held until the beginning of this year. Then the final payout is £8,767 for an average unit trust and £9,875 for a with-profit contract.

Separately, Scottish Widows yesterday said it would pay an extra £1.4bn to pension customers with guaranteed annuity rate (GAR) contracts. The payments follow the ruling by the House of Lords last year that Equitable Life could not pay smaller bonuses to GAR policyholders than to policyholders without the guarantee.