With-profits saver set to lose again as shares revive

The New Year will probably bring further unsettling news for the millions of people with money tied up in with-profits funds. This month marks the start of the annual bonus ritual, when life insurance companies decide how much profit they will hand out to policyholders.

With-profits funds are some of the most widely held investments in the UK, with around £400 billion invested in them. Dramatic cuts in bonuses over the past few years - leading to big shortfalls on pensions and mortgage endowments - have ensured that this once- obscure aspect of the investment world has become front- page news.

After last year's 13 per cent rise in the FTSE 100 share index, investors may be expecting improved bonuses, but insurers are making uncertain noises. Their general view is that one good year doesn't make up for three bad ones. Bonuses for investors with some of the stronger insurers may be held, but weaker companies - some of which stopped paying out bonuses at all last year - may not resume payments. This is particularly bad news for people stuck in 'closed' funds, where insurers no longer take new business.

The Financial Services Authority plans to introduce measures to protect policyholders in these funds, including an assessment of the fairness of exit penalties. At present investors are often trapped in poorly performing funds because of the cost of getting out. It will be up to 18 months before these measures take effect, but they may result in improved terms for people cutting their losses.

It may be too late, though, to revive faith in with-profits as an investment. It is not just falling returns, incomprehensible accounting and punitive early exit penalties that have tarnished it. The shadow of Equitable Life hangs over the whole industry. The insurer's near collapse exposed the structural weaknesses in this form of investment, and publication of the Penrose report into what went wrong at Equitable Life could remind everyone of the shortcomings of with-profits investments at around the same time as this year's bonuses are being declared.

'Penrose will kill off with-profits,' said one industry source last week. This sounds extreme, but it may not be wide of the mark.