Traumatic time for investors

Traumatic time for investors

This is the time of year when bumper credit card bills start to land on doormats and many of us are sweating over our tax forms.

It can be financially traumatic for another reason, too. This is when many people with endowment policies, pension plans and bonds are on tenterhooks, waiting for the latest information on how well - or, rather, badly - their investments are doing.

Millions of people holding with-profits policies have suffered hefty cuts to bonuses and maturity payouts during the last few years - and for many, the pain is likely to continue this year.

Most experts expect bonuses to be trimmed again and final payouts to be lower than last year. Tom McPhail at independent financial adviser Hargreaves Lansdown says he expects payouts to be cut by around 5% on average, but reckons that some policy-holders lucky enough to be with financially-strong companies may escape the reductions.

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The first three months of the year is when insurers traditionally make their annual bonus declarations, and the first of the biggies to reveal its hand will be Norwich Union, which is making its announcement on Tuesday. Standard Life's bonus declaration is scheduled for the end of this month, while Prudential's is due on February 22.

With a with-profits policy, the insurance company usually adds an annual (or regular) bonus each year in order to gradually increase its value, and then a final (or terminal) bonus at the end of the policy's term.

Bonus cuts during the middle of the year were almost unheard of until two or three years ago. Since then, unfortunately, we have heard plenty about them, as insurers have responded to the choppy investment conditions.

Further cuts to payouts will mean some people receiving thousands of pounds less than they were expecting. For mortgage endowment holders, that will increase the likelihood that some will face sizeable shortfalls on their home loans.

All eyes will be on Standard Life, whose 2.4 million with-profits policyholders (about half of whom hold endowments) have already been warned that things will almost certainly get worse before they get better. Three months ago, it said they should brace themselves for more bonus and payout cuts over the next couple of years.

At the last count, a maturing 25-year, £50-a-month Standard Life savings endowment policy was paying out £56,873 - down from £62,603 a year ago and £69,386 less than 18 months ago. This compares starkly with the £110,000 payout that an equivalent maturing 25-year Standard Life endowment was delivering about four years ago.

Standard Life's difficulties have been well-documented but, to be fair, it has performed significantly better than a number of other companies. A Scottish Widows policyholder whose 25-year, £50-a-month savings endowment has just matured will have received £46,103, while a customer of Provident Mutual (part of the Norwich Union empire) will have had to make do with £45,669.

At the other end of the spectrum are two member-owned insurers: Royal London, whose equivalent payout was £78,189, and Liverpool Victoria friendly society, which notched up an impressive £79,523.

Last week Liverpool Victoria revealed that all of its endowment holders whose policies are maturing now are enjoying a cash surplus on top of what's needed to pay off their mortgages. None of its endowment has ever suffered a shortfall on maturity - and it is guaranteeing to top up any shortfalls that do emerge.

A typical Liverpool Victoria 15-year endowment maturing this month and with a target amount of £50,000 is paying out £64,403 - which means a lump sum windfall of £14,403 for the holder.

One or two companies may spare their customers payout cuts this year, either because they are particularly strong financially or they have a commercial interest in ensuring with-profits continues to look a pretty good option. These could include Prudential, which last month announced that the annual bonus on its with-profits bond will be maintained at 3.25% this year.

Guardian Unlimited © Guardian Newspapers Limited 2005