Friends Provident is slashing the final bonus on 25-year endowment policies from 17.5 per cent down to five per cent.
The UK's sixth largest insurer issued a bonus announcement today announcing rate cuts on many of its 1.2million with profits policies – other insurers are now expected to follow suit.
The endowment final bonus cut means that policyholders with a maturing 25-year endowment that they have been paying £50 a month for will receive a payout of just £29,184 – last year, the figure was £36,425.
Andy Carr, Friends Provident chief actuary, said: "In the light of turbulent investment markets in 2008, we have reviewed bonus rates, Market Value Reductions (MVRs) and the asset allocation for our main With Profits Fund.
"We needed to reduce bonus rates to reflect the fall in underlying investment values."
Sharon Bratley, chartered financial planner at Fairinvestment.co.uk says that despite the fact that with-profit funds are supposedly designed to smooth investment returns over good and bad periods, endowment
policy holders have seen little evidence of this kind of protection over recent months, and this latest announcement from Friends Provident is just more bad news.
"People are already struggling with their day to day living expenses, so finding out that the final bonus rate on their endowment has been cut too – potentially leading to an endowment shortfall
– is just rubbing salt into the wound," she said.
Many endowment policyholders will now be thinking about cashing their policies back to the insurance company, but, says Mrs Bratley it is important that they explore all the options, and not just settle for the surrender value offered to them, as this may be significantly less than they could get on the second hand market.
"Those with endowment policies basically have four choices; continue paying into the policy, making their policy 'paid up' which means keeping it but stopping contributions to it, surrendering it back to the insurance company or selling it on to an endowment broker," she said.
"Policyholders can get more – an average of 10 to 15 per cent more – by selling rather than surrendering – and there is potential for up to 45 per cent more, so it is certainly worth considering."
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