Final countdown

By JUSTIN HARPER FOR MAILONLINE
Updated:

 

THE future of with-profits pensions and endowment policies have been dealt their severest blow yet after a controversial move by one of Britain's biggest insurers.

This week Legal & General cut final bonuses on with-profits pensions and endowments by up to 9.5%, causing misery for about two million policyholders.

About ten million people holding with-profits policies in Britain face an uncertain future as the final bonuses they are relying upon to boost their pension and endowment pots are being eaten into. In many cases, the final bonus makes up more than half the value of a with-profits payout. But unlike annual bonuses, they are not guaranteed and can be cut as and when the insurer chooses.

Our table below shows how the final bonus now makes up less of the total payout of a with-profits endowment than it did four years ago - in the case of Axa it is 19% lower. By making such swingeing cuts, insurers have wiped billions off the payout values of these inflexible plans even though savers have stayed loyal for 25 years.

One of Britain's biggest independent financial advisers, Hargreaves Lansdown, stopped actively selling with-profits policies in July and paints a very gloomy picture for their future.

Tom McPhail, pensions research manager at Hargreaves Lansdown, says: 'There was a time when the only point in holding on to the policy was the major uplift you'd get from the final bonus - now even this is in jeopardy.' We fully expect final bonus rates to fall even further, even if the stock market picks up.'

He explains: 'Insurers are already paying out bonus rates about 15% above what they should be paying out. Anyone with a with-profits policy is bound to see an even lower pay-out next year.'

Legal & General is not the only insurer to cut valuable final bonuses in the past few months. Big insurers including Prudential, Norwich Union, Royal & SunAlliance and Standard Life have all made similar moves causing financial headaches for millions of people facing retirement and using endowments to pay off their mortgages.

Patrick Connolly, director at independent financial adviser Chartwell, says the cutting back of final bonuses further highlights the flaws of with-profits plans: 'Companies have paid out too much money in previous years and held very little back. So now we've had a couple of bad years the effect on your fund will be immediate. This is hardly an advert for smooth returns - one of with-profits' main selling points.'

Legal & General's move is controversial because at the same time as cutting bonus rates for loyal, long-term savers, it is also making it easier for other policyholders to leave its funds.

It is reducing the exit penalties it charges people wanting to transfer their policies from 19% down to an average of 13% for pension policies and 14% for endowments.

Mick McAteer, senior policy adviser at the Consumers' Association, says: 'This seems to be very unfair on those borrowers who stick with their insurance company through some kind of misplaced loyalty. A move such as this shows just how flawed with-profits polices are. The regular premiums you pay into these policies are not ring-fenced so the insurance company can do whatever it likes with your money.'

Legal & General has cut final bonuses on pensions polices by up to 9.5%, and up to 7.5% for endowments. This means someone who has paid £50 a month into a 25-year Legal & General endowment maturing now will get a payout of £66,348. A similar policy maturing last month would have paid £71,423 - meaning a drop of £5,075 in a few weeks.

Peter Timberlake, a spokesman for Legal & General, tried to defend the move that seems to favour short-term investors over those who have stuck with the company until the bitter end.

He says: 'This is not about loyalty. We have to try to be fair to all our policyholders as the money is held in one pot.'

• DAVID EASTHAM (pictured with his wife Sarah and daughter Caitlin, six) has a Legal & General endowment which he took out in 1989 to pay off his mortgage.

He has since converted part of his endowment mortgage to a repayment one to tackle a £14,000 shortfall he is facing.

Mr Eastham, a 36-year-old aircraft designer from Chorley, Lancashire, pays £74 into the endowment and £362 into the repayment mortgage.

He says: 'The final bonus should make up some of the shortfall built up over the bad years but this is becoming less likely now. 'Thankfully I made a decision not to rely completely on the endowment to pay off my mortgage - I'm sure lots more people will follow suit.'

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