Chartered financial planner at Fairinvestment.co.uk, Sharon Bratley, comments on the recent announcements from Standard Life, Legal & General and Norwich Union that final bonuses will be cut on their with-profits products including endowments, pensions and savings
"Again, insurance companies seem to be taking a very short term view, to the detriment of the investor. Although the rationale behind with-profits is that it is supposed to smooth the peaks and troughs of equity investment for investors, over the long term, there never appears to be a good time for people to withdraw their money or for their policy to mature.
"It seems to be a vicious circle for investors where bonuses are cut, MVRs introduced, both of which make it impractical for people to encash their policies. By the time that markets recover sufficiently for bonus rates to rise again and for the companies to stop applying MVRs, markets take a tumble and insurance companies immediately take the decision to reduce bonuses and invoke MVRs again.
"Importantly, whilst the market is rising, with-profits policyholders don’t feel any benefit until bonus rates actually rise and this could be many months or potentially years, and in practice with-profits investors miss out on some of the most significant growth in the market. Where exactly are the reserves that the insurance companies are supposed to have built up in order to cushion investors from short term dips in the market?
"Had investors held cash then their investment wouldn’t have fluctuated and had they held shares, then yes, their investment would have fluctuated but provided they had remained invested then at least they would have benefited when the market recovered.
"This makes it difficult for holders of with profits investments to know what to do. Most with profits investments have a simple choice, hold on to the investment, switch into another fund or surrender. Luckily, those investors who have trusted the repayment of their mortgage to an endowment have a further option which is to sell it on the second hand market and although not guaranteed, this could provide a better result than the other options."