Savers left without profits

Published on Saturday 2 May 2009 13:31

INVESTORS who have with-profits endowment and savings plans are being hit hard by cuts to bonuses imposed in the wake of the stock market crash. Some investors have been left speechless by an apparent overnight slashing of terminal bonuses, which sliced their investments by up to 20%.

Most insurance companies have diced bonuses, including Standard Life, Norwich Union, the Prudential, Legal & General and Friends Provident.

In some cases the reductions have been substantial. One Scotland on Sunday reader (see letter below) was last year told his 22,825 loan would be paid off and he would be handed an extra 2,575 when his 25-year endowment with Scottish Amicable, now owned by the Prudential, matured in June next year, producing 25,400.

He was dumbstruck only months later to be told the policy would not even pay off his loan. Rather he would get 21,100, a drop of 16%, which left him with a 1,725 shortfall.

When he contacted the company, he was told it had stopped paying terminal bonuses. This is not the case, but some might be forgiven for concluding it might just as well have done. The Prudential cut the bonuses on former Scottish Amicable policies last November and again in February. These combined cuts reduced the value of contracts by up to 20%.

This reader is not alone. Another was equally furious after investing in a 10-year savings plan with Standard Life only to receive back little more than he paid in.

Such investors are particularly aggrieved because they often buy the policies after being persuaded by salesmen that with-profits contracts protect consumers against aggressive stock market slumps.

This is because not only are they invested in a wide range of assets, which in itself reduces the risk associated with a particular sector, but they also have a smoothing effect. In theory, this means that money is held back in the good years to pay out a bit extra in the bad. In other words, they should never be brilliant or disastrous investments, but muddle along nicely.

However, some financial advisers are deeply sceptical about such claims. Alan Steel, of Steel Asset Management, maintains that insurance savings plans were designed in an age when such premiums attracted tax relief, and have little validity today.

He argues: "After tax relief was removed in 1984, there was very little incentive for people to take out with-profits savings plans. They are not very tax-efficient, because returns are taxed internally within the fund, but in addition to this charges are often high. When you add to that the impact of the bear market on investments, it is not surprising that policyholders are upset."

Tom McPhail, of Hargreaves Lansdown, added: "The reader's Standard Life investment is sadly typical of the experience of many investors over the past 10 years. With-profits plans generally paid out very well for maturing investors up until around 2001 but since then the performance has been mediocre at best.

"These plans were sold with the expectation that the high returns of the 1980s and 1990s would be maintained. In reality this was never likely to happen, and when the stock market collapsed in 2000 the insurance companies were left high and dry. Investors have been paying for this ever since."

A spokeswoman for the Prudential said volatile markets forced the company to reduce the terminal bonus rates to safeguard Prudential's with-profits fund and to protect the interests of customers over the medium to long term.

She added: "We expect 37,090 Scottish Amicable policies to mature in 2009. Of these, some 20,800 policies are not anticipated to meet their target amount, but the average shortfall is around 713. The 16,290 policies expected to meet target will pay an average surplus of 2,876."

A Standard Life spokesman defended its record: "There's no type of investment that will always outperform others. Bank or building society deposits offer some cash security but, historically, over many periods of time they have underperformed investments with an equity link. However, equity-based products can produce poorer returns when market conditions are depressed, as in recent months, and some investors may end up with a lot less than they invested.

"Your reader's plan guaranteed a minimum payout of 6,281.95 irrespective of market conditions at its maturity date. Most other types of investments with an equity link would not have benefited in this way. Investment returns have been hugely variable since the reader's plan started but, despite the severely depressed market conditions, it still paid out slightly more than the minimum guaranteed amount."

In fact, the fund has performed slightly better than average. According to Money Management, the same investment in a general managed fund would have produced 3,881 in the worst fund, 5,784 in an average fund and 9,905 in a top-performing fund. Our reader received 6,294.

Steel says investors should save monthly but they would do better with a top-performing fund and ensuring all returns were protected by the tax shelter provided by an Isa.

McPhail concludes: "For long-term investors the stock market is still a good place to invest, particularly if you are paying in a regular contribution. But don't use a with-profits fund. You would be better off going into a selection of unit trusts.

"It is notable that Standard Life has now all but given up marketing any with-profits plans."

'I've gone from surplus to shortfall'

My mortgage plan matures on June 28, 2010, for the amount of 22,825. For the past three years I have received 'green' letters from the Prudential regarding the plan.

The last 'green' letter was dated August 2008 and, based on a reasonable growth of 6%, projected a surplus of 2,575.

Last weekend I received a 'red' letter again projecting 6% but with a shortfall of 1,725

I have made contact with Prudential and am informed they have stopped terminal bonuses. As there has been no correspondence regarding this matter, can they do this?

I have not read in the press that Prudential are having difficulties. In fact, the letter of August 2008 stated "another strong year for with-profits funds".

Am I being taken for a mug? In eight months they've gone from surplus to shortfall.

SD, Dundee

'My return after 10 years was shocking'

I took out an investment plan with Standard Life 10 years ago, which has turned out to be appalling. This was a versatile investment plan divided into five individual equity plans investing 10 per month over a 10-year period.

Although I was shown the highly impressive illustrations of what these types of plans had paid out before, I was advised that if I wanted a better return than a bank or a building society would provide back in 1999 then this was the type of investment recommended to me by an independent financial adviser.

My investment return was shocking, as I had paid in 6,000 and received a paltry sum of 6,294.50 after 10 years in a 'with-profits fund' which was supposed to protect the bonuses in the good years and in the event of poorer returns a smoothing process would kick in. I can see no evidence of this.

Can you please advise me and others where I went wrong with this type of investment and hopefully stop people from making the same mistake as I did, and that, no matter what the adviser says, you probably will not get anything like what their illustrations show. Indeed you may have been better with other alternatives and assurances.

I realise the past 10 years have not been all that good, nor have they all been bad. But when I read in the papers that Standard Life staff had been rewarded with trips to the Caribbean for successful performances, there are questions which must be answered.

Exactly where did these funds come from if I have just received a maturity sum which included a pathetic sum of 12.55 final bonus?

Guess who will not be going to the Caribbean after a wasted 10 years of entrusting this company to return any form of a fair investment return. Please warn your readers.

AM, Glasgow