Since January 2008, three of the UK's leading mortgage with profits endowment providers have slashed their final payouts by as much as 10 per cent.
Friends Provident was the first to make its with profits bonus announcement in July, which showed a clear 10 per cent void between the pay out that would have been received in July this year (£32,885) compared to the amount that would have been received had the plan matured in January this year (£36,425), based on a male aged 29 at outset, paying £50 per month for 25 years.
Speaking at the time, Friends Provident chief actuary Brian Harrison said: "To maintain payouts at January levels we needed annualised returns of around 8% on longer term policies. However, the estimated return on the fund over the first six months is minus 7.25%."
Next to announce cuts was Standard Life at the end of August, with similar results to Friends Provident for a 29 year old male at outset with a 25 year mortgage endowment policy investing £50 a month. Standard Life showed a final payout drop of 8 per cent in the six months from January to August. In January 2008 the policy would have paid out £37,763 compared to £34,701 in August.
The final nail in the mortgage endowment coffin came from Norwich Union earlier this month with an average 7 per cent reduction for a similar policy. The policy holder would have got £45,911 in January this year, compared to just £42,885 on September 1.
Commenting on the poor returns, Fairinvestment.co.uk's chartered financial planner, Sharon Bratley said: "With-profit funds are supposedly designed to smooth investment returns over good and bad periods, to protect investors from volatile stock markets. However, endowment
policy holders have seen little evidence of this protection over the last 12 months, with three of the major endowment providers making significant cuts in bonuses.
"For those already struggling with rising energy and food bills, finding out that the bonus rates for their endowments are reducing, which could potentially lead to an endowment shortfall to cover their mortgage, is just more bad news.
"For people thinking of cashing in their policies back to the insurance company, it is important to explore all the options. Policy holders basically have four choices. They can continue paying into the policy, they can make their policy 'paid up' whereby they keep the policy at a reduced level but stop making contributions to it. They can surrender it back to the insurance company who will offer a price for it or they can possibly sell it to an endowment broker.
Mrs Bratley continued, "Policyholders are currently receiving an average of 10 to 15 per cent more than the surrender value of a policy by selling them on to market makers, and could get up to 45 per cent more, so it is worth getting a quote for selling the policy and compare this with what they could get surrendering it."
Find out more about selling endowment policies