Scottish Widows cuts with-profits payouts

Scottish Widows has become the latest insurance company to slash bonus rates on its with-profits policies.

Most of its 775,000 policies will pay out less than they did last year, as Scottish Widows said its £14bn with-profits fund fell by 17.5 per cent last year.

The company also announced cuts to its annual bonus rates, which is seen as a sign of recognition that the investment climate will stay poor for some time.

“Insurance companies don’t like cutting annual bonuses as typically they try to set them at a sustainable long term level. It’s a recognition we’re in this for the long haul,” said Tom McPhail, head of pensions research at Hargreaves Lansdown, the financial adviser.

Life contracts such as endowment policies and pensions taken out after February 1999 have had their bonus rates halved. And investors who bought a pension with the company before February 1999 will receive no bonus at all, either annual or final.

With-profits endowments holders also face the bad news that their policies have missed their targets. A 25-year mortgage endowment, assuming payments of £50 a month, will pay out just £29,678, £3,633 short of its target payout.

People holding a with-profits pension policy from Scottish Widows will be particularly badly hit. A 20-year policy, assuming regular savings of £200 a month, is now paying out just £75,140, down from £85,722 a year ago.

Mr McPhail said the reduction in bonuses could be a sign that the company had paid out bonuses that were “too generous” in previous years.

Insurance companies use a process called smoothing to determine how much money its with-profits policyholders will receive, holding back profits in good years to pay them out in bad years.