Pru slashes payouts on with-profit policies

Prudential has become the latest insurer to slash payouts on its with-profits policies as it felt the effects of falling equity markets on its with-profits fund. The company said it was reducing the final bonus rates on policies under the Prudential, Prudential International and Scottish Amicable brand names with effect from today.

It is cutting the amount policyholders will receive when their policy comes to the end of its term, or if it is cashed in early, by between 5 and 10 per cent. Someone with a 10-year with-profits bond will receive around a £1,000 less than if their policy had matured in February this year. No exit penalties are applied if the amount cashed-in is less than £25,000.

A spokesman said the move could potentially affect about 2 million people. The cuts will affect savers with with-profit based pensions and long-term with-profits bonds, but will not affect those with endowment policies saving to pay off their mortgages, he added.

With-profit policies aim to smooth out stock market volatility throughout the course of an investment, by holding back some of the gains in good years to cushion savers in poor years. They are often used as savings vehicles for mortgages and pensions. However, they have been criticised by City regulators and the recent Sandler review, for having heavy initial charges and complex bonus structures.

A number of rival insurers have also cut their payouts. Norwich Union, owned by CGNU, said in July it would cut 5 per cent from payouts on its with-profits policies. Scottish Widows, owned by Lloyds TSB, has also announced it will cut returns on its policies.

Mark Wood, the chief executive of Prudential UK and chairman of Scottish Amicable Life said: "This is the right course of action to take at this time in order to protect our with-profits investors. In just over two and a half years the UK stock market has fallen by nearly 40 per cent, yet the strength of our well-diversified with-profits fund has shielded our investors from the full impact of this decline."