Norwich Union with-profits blow

NORWICH Union, the UK's largest insurer, has cut bonus rates on its with-profits pensions, bonds and endowments by up to 19%.

The regular or annual bonus rate on with-profits savings, which is calculated as a percentage of the sum assured and added yearly, is 4.25% this year, compared to 5.25% last year.

In effect, a 1% cut means policyholders savings will grow at a rate 19% more slowly than they were last year.

NU says the cuts, which apply to an estimated 3.5m policies, are needed to reflect the ongoing falls in stock market returns. The FTSE 100 fell by 16% in 2001, following the previous year‘s fall of 10%.

The company is also warning savers that they can expect rates to fall even further, as it anticipates continuing low investment returns which must be reflected in bonus rates.

While a 1% cut may not sound that serious, this can eat into the returns savers might expect on their investments.

For example, a 29-year-old man saving to pay off a £60,000 mortgage using a 25-year conventional low-cost endowment could have a basic sum assured of about £20,000. This means a 1% cut will see him receiving £200 less on his policy every year.

Over the term of the policy the build-up of this effect could mean the endowment might not grow enough to pay off the mortgage debt.

NU deputy actuary John Lister says: 'We have tried to get the balance right between being prudent and cutting rates ferociously.'