Bonus cuts hit savers

By JAMES HOPEGOOD
Updated: 19:00 EST, 12 October 2001

PEOPLE with insurance-based saving plans are suffering big, though heavily disguised, cuts in their long-term growth prospects.

Annual bonus rates awarded on with-profits savings policies are being cut by seemingly innocuous amounts of between a quarter and half a percentage point. While these cuts seem tiny, the cumulative effect can have a devastating effect on long-term savings.

The annual bonus you get is worked out as a percentage of your basic sum assured. The basic sum assured is written on your policy at the outset - it is the minimum amount you will get if you pay your premiums for the full term.

A 29-year-old man saving to pay off a £60,000 home loan using a 25-year conventional low-cost endowment will have a basic sum assured of about £20,000.

So if your sum assured is £20,000, a half a% cut will mean you are receiving £100 less on your policy. Over the years, this will have a serious cumulative effect on your money. Newer unitised with-profits plans base bonuses on your contribution.

As a result, savings build up more slowly than expected. Pension pots will be smaller, bonds will pay less and more endowments may fail to pay off maturing mortgages. Scottish Widows, Friends Provident, Royal & SunAlliance and Legal & General have all cut the annual bonuses they pay on some or all of their savings plans.

With-profits companies announce the annual bonus or interest rate they will add to customers' savings at the start of each year. It is very unusual for annual bonuses to be cut part way through the year.

Hand in hand with these cuts come reductions in the amount of terminal bonuses paid, of up to 25%. Terminal bonuses can account for as much as half the value of a final with-profits pay-out.

Legal & General has cut the annual bonus for with-profits bonds taken out after October 1, from 6.25% to 5.75%.

A £10,000 bond taken out before that date will have £625 added to the fund after a year. Now the same saver will get only £575 added to the original investment.

Royal & SunAlliance has cut annual bonuses by 0.5% on bonds and pensions. This means the value of £10,000 invested in a with-profits bond five years ago falls more than £200 from £13,263 to £13,054. And this takes into account only three months at the lower 4% rate.

It has also cut terminal bonuses, and the effect of this will be to knock almost £600 off the pay-out from a tenyear endowment taken out by a 29-year- old man paying £50 a month. He will now get £8,447.

Scottish Widows also cut both annual and terminal bonuses. While the company is holding the annual bonus paid to with-profits annuitants at 5%, they will still suffer thanks to the terminal bonus cut.

A customer who took out a Scottish Widows with-profits annuity before 1999 sees every £100 of monthly pension income cut to £97.

The cash-in value after 15 years of a Scottish Widows 25-year endowment taken out by a 29-year-old man paying £50 a month has fallen from £16,181 at the start of June to £15,144 on July 1, thanks to annual bonus rate cut.