Your Money: Time to hold your breath

Homeowners with endowment mortgages will be looking closely at bonus results

Every year, at about this time, a strange kind of beauty parade takes place, involving dozens of insurance companies. However, in this case, insurers are not out to persuade us of their physical attributes. Their aim is to dazzle us with their investment performance.

One after another in the coming weeks, each insurer will announce a set of "bonus results" - figures which reveal exactly how much a with-profits endowment taken out with them, and about to mature this year, will pay out.

The importance of bonus results should not be underestimated. These figures tell millions of homeowners whether they will be able to pay off the mortgages they borrowed anything up to 25 years ago. Hundreds of thousands of people invest in with-profits personal pensions, while billions of pounds are placed in with-profits bonds each year.

The signs so far are not encouraging. Of the five or six that have declared, more are down than up. Royal London announced last week that it was increasing maturity payouts for some policyholders. Someone aged 30 who took out a policy at pounds 50 a month would expect to receive pounds 124,835 after 25 years, up on the pounds 115,416 paid out last January.

Guardian Royal Exchange (GRE) has also upped its own payments on the same investment. But Scottish Provident, has cut its payout by 5.7 per cent. Friends Provident is reducing its maturity value from pounds 108,587 to pounds 106,434. Norwich Union also announced cuts in its rates on Friday.

The picture is not uniform across all investment periods: a 10-year policy with Scottish Provident actually saw payouts increase slightly, by about 0.5 per cent, as did Royal London. But most 15-year policies have fallen. Overall, the clear implication is that the majority of insurers are likely to cut their payouts, grim news if your mortgage is about to mature or you are poised to retire.

With-profit policies are as old as insurance itself. Many of the earliest companies were mutuals, owned by the policyholders, who received a share of each year's profits in the form of an annual bonus. Some companies also began to pay an extra bonus when the policy matured, which came to be known as the terminal bonus, and investors began to use with-profits contracts increasingly for savings rather than simple life assurance.

The explosion in sales began in the Seventies, when insurers devised a low-cost endowment policy, which pared premiums to the minimum, while still promising attractive returns.Both lenders and insurers earned billions of pounds in commission by persuading homeowners that these new policies were the best way to repay a mortgage.

The question insurers must answer, however, is why maturities are falling at the end of a period when investment returns have been so good.

David Beale, of Beale Dobie, a company which buys and sells second-hand endowment policies, is highly critical of the companies' decision to cut payouts, especially after last year's stock-market performance.

He says: "The All-Share [index] has given a total return of over 14 per cent, and the FTSE [index of the top 100 companies] has done slightly better at 18 per cent. The total return from the US market has been 20 per cent, and more than 25 per cent from longer-term fixed-interest gilts.

"Against this background there would seem to be little justification for cutting maturity payouts, particularly in respect of 25-year contracts, where 1973 falls out of the equation.

By contrast, David Robinson, marketing manager at Scottish Provident, says that, if anything, he is "baffled" by the fact that some companies appear to be raising their payouts. He stresses that a company must take into account likely future performance when assessing how much to pay out, and is not too impressed by the suggestion that payouts should rise because 1973, a bad year, has dropped out of the 25-year equation. "Only one year's premiums would have been affected by that year's poor performance," he says.

Mr Robinson adds that, unlike some companies, Scottish Provident prefers to cut rates gradually now, rather than do so in much sharper bursts in a year or two's time.

The problem remains that guaranteed annual bonuses now comprise little more than 20 per cent of the final nest egg with some insurers. This turns on its head the "safety" argument on which with-profits depended. As John Jenkins, at accountancy firm KPMG, points out: "The risk with an investment directly linked to the stock market is that there could be a crash just before it matures. But historically, markets only collapse by about 30 per cent at most. In theory, with a with-profits policy, you could lose considerably more if a company simply declined to pay a terminal bonus."

While there is no suggestion that companies will cut final payouts by that extent, the fact remains that the past few years' worth of bonus announcements have caused major uncertainty for millions of borrowers.