Time for a change of policy

The fraught events surrounding Equitable Life could prompt many of its 650,000 policyholders to consider cashing in their policies, but most financial experts are advising a 'wait-and-see' approach over the next few weeks

This has been a stressful and confusing week for the 650,000 with-profit policyholders of Equitable Life, the beleaguered 238-year-old mutual life assurer that closed for new business last week.

This has been a stressful and confusing week for the 650,000 with-profit policyholders of Equitable Life, the beleaguered 238-year-old mutual life assurer that closed for new business last week.

Most policyholders will have heard the news that they are very likely to see a significant reduction in the return on their policy, due to a change in the investment strategy for the with-profits fund that Equitable will be forced to make in the future.

The new strategy was forced on the Equitable when talks aimed at selling it to the Prudential collapsed. The Equitable needed to find a buyer to fund a black hole in its accounts of at least £1.5bn. The money was in turn needed to fund promises of guaranteed annuity rates to 90,000 people.

As a result there will be a reduction in returns for with-profits policyholders of at least 1 per cent per annum. The society is also opting to give policyholders who want to surrender their policy a sum that is less than the value of their investment. It says it will give you 90 per cent of the value of your policy, but this level could decline further.

While news of this penalty has been quick to circulate, prompting many to consider cashing in their policy, experts say it is unwise to make a quick decision. The only group who need to decide quickly are those who took out a policy between 24 November and 8 December. This group can annul the policy without incurring any charges if they state this intention by 22 December.

Surrendering the policy will free you from lower returns; keeping it may cost less in the long run. Which option is best depends on what type of policy you have and how close you are to its maturity date.

With the Equitable's helplines jammed for most of this week, here is The Independent's guide to how the current situation.

I have a with-profits policy. How will I be affected?

Endowments

As well as seeing a downturn in the return on your policy, Equitable, unlike many other insurers, does not allow you to keep your policy without paying further contributions. So you either have to continue to pay contributions, in the grim knowledge that your investment will pay out less in the future, or you have to cash the policy in and accept that you will only get about 90 per cent of its value.

However, it is important not to be too hasty - to take the money and run to another provider. The key question is how near to maturity your endowment is. Clive Scott-Hopkins of the independent financial advisers Towry Law says: "If you have a 25-year endowment and are within five years of maturity it would be best to hang on as you would loose a considerable sum from surrendering it. But if you are near the start, I would call it a day".

Pensions

Most of Equitable's pensions are single premium products, which means you pay all the charges up front but then don't have to pay fees when you contribute and are under no obligations to make regular contributions.

The advice on these policies is to hang on to them, as you are not obliged to contribute any more and have already paid your fees. But you should make sure you keep the policy until maturity to avoid being hit by the 10 per cent discount.

Annuities

If your pension fund is near to maturity with Equitable, don't buy an annuity with them. If you already have one you are obliged by law to continue drawing your annuity income from Equitable, despite the inevitable downturn in its return. But the society is aware that the recent problems hit this group hard and it is possible that it will find a way to transfer its annuity book to another provider.

Drawdown and Additional Voluntary Contributions (AVCs)

Drawdown pensions can be transferred to another provider but you will be hit by the 10 per cent charge unless you convert the drawdown income into an annuity. AVCs, of which Equitable is one of the largest providers, are run by employers. So you can withdraw from the AVC, but switching to a new provider is your employer's decision.

Bonds

If you have held a with-profit bond for five years you can get out without incurring the 10 per cent penalty. If not, this will apply. However, bonds just like all the other types of policy, will suffer from the investment changes. The society has reduced its annual bonus rate on bonds far more drastically than other life assurers, from just under 8 per cent in 1990 to 4 per cent in 1998.

I do not have a with-profits policy, so do I escape?

Those with the unit-linked variety will be less affected, but experts say the rush out of Equitable's funds is so great that all policyholders will suffer. This is because fund managers will struggle to sell off their most liquid stocks, leaving their other holdings ones that are likely to give a poorer return. However, if you do want to move on, you should bear in mind that you will be leaving funds that have had a four- and five-star rating in the last five years.

Will the situation get any worse?

IFAs have reported that they have been deluged this week by clients who want to surrender their policy irrespective of the cost because they have lost faith in the Equitable. As a result, there may well be pressure on the society to make the penalty for leaving even greater than a discount of 10 per cent.

Craig Wetton, chief executive of the IFAs Chartwell, said: "Equitable may increase the sum they are taking off polices from 10 per cent to more if there is a run of people cashing them in. But they may leave it at this level to deter people to leave and then bring it down. It will make very little difference if you sell the policy on Monday or at the end of the week, so hang on for a few days."

Do I have any grounds for compensation?

Probably not. The Financial Services Authority and the Consumers' Association have said Equitable has acted in line with the terms of with-profits policies. However, many poliyholders disagree and have set up groups to lobby for redress. If you want to join them click on www.emag.org.uk.

Alternatively, IFAs have produced free guides to help you decide. Call Towry Law on 0845 788 9933 or Chartwell on 01225 321 700. Or contact Equitable on 01296 385 588.