Scottish Widows announces with-profits bonus cuts

23 January 2004
Scottish Widows has announced that it is cutting bonus rates for policyholders.

The insurer plans a reduction of between 0.5 per cent and one per cent for policyholders of unitised with-profits life and pensions policies.

The firm, owned by Lloyds TSB, said its new products - the Flexible Options Bond Growth and Income Fund - will fare better, with their rates increasing.

The cuts mean that someone who had paid £50 a month into an endowment policy for 20 years will see the final value of their investment fall to £23,234, compared with £27,678 if it had matured in February 2003. The final payout on a pensions policy into which someone had paid £200 for 20 years has fallen to £109,559, compared with £128,034 a year earlier.

Insurers are currently in their bonus declaration seasons, when policyholders find out how their investments are progressing.

Scottish Widows is the latest in string of insurers to cut rates. Last week, Norwich Union announced cuts by up to 10 per cent on most of its annual bonuses and Axa Sun Life also announced cuts.

Prudential, however, increased its bonus rates for 375,000 Prubond customers, though most Prudential customers must wait until the end of February before they find out how their with-profits investments are progressing.

With-profits policies aim to smooth out stock market highs and lows with some of the investment return in good years for the stock market held back to allow for better payouts in bad years. Slumping share prices throughout 2001 and 2002 forced most firms to trim bonus rates on their policies.

Adrian Eastwood, actuarial director of Scottish Widows, said: "A partial recovery in stock markets over the last 12 months has enabled Scottish Widows to increase bonus rates on the Flexible Options Bond Growth Fund.

"However, stock markets still have a long way to go before they get back to previous levels. As a result, further reductions in regular bonus rates are necessary for those types of policy that have experienced the effects of sustained falls in asset values."