Returns on with-profits policies fell for Legal & General’s endowment and pensions policyholders after the company said it had experienced ”large falls in most major investment markets”.
The news follows similar announcements from other insurers this year. Friends Provident, Norwich Union and Scottish Widows have all announced cuts on bonuses on their with-profits policies.
L&G’s cuts will leave hundreds of thousands out of pocket as about 750,000 people have with-profits policies with L&G, covering pensions, savings and mortgage endowments and bonds.
About 200,000 holders of with-profits bonds will be the hardest hit.
Based on an initial investment of £10,000, a policy taken out in 1999 would have a cash-in value today of £11,224, compared with £13,645 at the same point last year, L&G said. This is a fall of 17.7 per cent, taking into account the conventional and final bonus payments, the insurer said.
A 25-year mortgage endowment policy taken out by a 29-year male paying £50 a month, has fallen in value by 9.5 per cent, according to L&G.
Despite the falls, L&G defended its with profits policies, saying they give significant protection to investors in volatile market conditions through smoothing of returns and investment in a wide range of asset types. But the group said that in most cases investors were being cushioned from the full extent of the falls, after the value of its with-profits fund dropped by 18 per cent during the year.
L&G also said that over the last five years, assets invested for investors in its with profits fund have returned 27 per cent before tax, outperforming the average balanced managed fund return of 21 per cent.
Meanwhile, L&G also revealed a 36 per cent increase in the number of red warning letters being sent to endowment policy holders in 2008, which warn of a shortfall on the policy.
Around 64 per cent of endowment policyholders were sent a red letter in 2008, up from 28 per cent the year before. Amber letters sent to policyholders also rose by 12 per cent while green letters rose by 24 per cent.
Carl Dowthwaite, finance director of Legal & General’s with-profits business, said: ”With profits continues to provide attractive long term returns and has given customers genuine protection from market volatility.
”In current market conditions the core features of with profits mean that it remains a good choice for investors. Our investment strategy puts us in a strong position to benefit from market recovery”
