Friends Provident cuts with-profits bonuses

Friends Provident today became the latest life insurer to announce it was slashing the rates it paid to its long-term savers.

The group said that the final payouts on with-profits life and pension policies would be cut by an average of 6% and warned there could be further reductions ahead. It announced that most regular bonus rates had been reduced, in some cases by up to 50%, and some final bonus payments had also been cut.

The move, which represents the third time Friends Provident has reduced rates in a year, comes despite the fact that the group's with-profits fund made an investment return of 9.4% during 2003.

Ben Gunn, managing director of Friends Provident Life and Pensions Limited, said: "Our object in setting new bonus rates is to be fair to our customers both now and in the future.

"Although the with-profits fund has returned positive growth, at 9.4%, for the first time in three years, the cumulative investment return since 2000 is still negative, at minus 6.5%, reflecting the large fall in investments over this period."

He said the group expected future investment returns to be lower than those seen during the past two decades, meaning regular bonus rates could come down further over time.

With-profits funds are long-term savings policies which aim to smooth out stock market volatility. They are often taken out as a pension or endowment mortgage. However, three years of falling stock markets have hit the policies hard, leaving many people with endowments facing shortfalls between the maturity value of their investment and the amount they owe on their mortgage.

The impact of today's decision means that someone who had paid ?50 a month into an endowment policy for 25 years will see the maturity value of their policy fall to ?51,283 from ?58,535 if the policy had matured in August last year.

Someone who had paid ?200 a month into a pension policy for 20 years will see the value of their investment fall to ?127,273 on maturity, compared with ?146,373 if it had matured in August.

Last month the former mutual, which is based in Dorking, Surrey, said 2003 had been its best year for new business, with its UK market share growing by 25% during the first nine months of the year.

Other insurers, including Scottish Widows, Norwich Union and Standard Life, have all recently announced cuts to the bonuses paid on some of their with-profits policies.