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Gloomy news from Friends Provident for homeowners

From the Swindon Advertiser, first published Thursday 7th Mar 2002.

Life insurer Friends Provident has heaped bad news on homeowners with endowment mortgages, warning that investment returns were likely to be lower in future.

The group also confirmed that it would be reducing both annual and final bonuses paid on endowment policies this year due to bad investment returns.

It said: "The negative investment returns experienced in 2000 and 2001 have still not been fully reflected in payout levels.

"As a result, unless there is a significant growth in equity and property values in the remainder of 2002, further reductions in payout levels are likely."

The group added that it would be writing to policyholders shortly telling them if their investment was on track, but its announcement makes it more likely that policies may not be big enough on maturity to pay off mortgages.

Friends said the regular bonus it pays each year on the money invested in a conventional endowment policy would remain at two per cent.

But the level of the bonus it pays out on previous investment returns, the so-called bonus on bonuses, would be reduced to 2.25 per cent from 2.5 per cent the previous year.

The final bonus, which is paid when a policy matures, will be slashed from a maximum of 162.5 per cent to 155 per cent.

The cuts mean that someone who paid £50 a month into an endowment policy for 25 years will see the final value of the investment fall to £77,096 from £93,145 if it had matured in February last year.

But the group said the smoothing-out process, which aims to cushion savers from bad investment years, meant it would still achieve real returns of around seven per cent a year after tax and inflation.

The group also announced it was cutting regular bonuses on unitised with-profit endowment policies to 4.25 per cent from 4.75 per cent, while unitised pension policies would have the rates reduced to 4.75 per cent from 5.5 per cent.

The decision follows similar moves from other big life insurers, including Scottish Widows, Norwich Union and Prudential, who have all slashed bonuses on with-profits policies following falls in equities.

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