When not to cash in

Anyone who is paying premiums into a with-profits endowment policy or pension plan should be taking note of the current spate of announcements from the insurance companies - but not too much notice.

The bonus declaration season which lasts from January to March throws up a bewildering array of £ per %, reversionary and terminal bonuses. Underneath the complex computations it is possible to understand what is happening to the payments made as a result of these hieroglyphics.

At the moment the simple fact is that the bonuses are being cut to reflect the poor investment climate of the past few years. But the bonuses come in two guises - annual bonuses that are added each year and become part of the policy's value for ever after, and terminal bonuses which are added at the end to make up the final payment which should reflect what the policy has actually earned during its existence.

The whole with-profits machinery is rather creaky. Why does there have to be an annual bonus declaration with that return set for a full 12 months. After 11 months and three weeks that return could look out of step with the investment climate and might give unfair returns to those with policies maturing at the back end of the company's year. Modern computers could surely produce more frequent smaller adjustments to the returns, which would not harm the smooth returns of with-profits polices.

The terminal bonus typically makes up 30 to 50 per cent of the payment,, and you do not get all of it or even a timely proportion of it if the policy is terminated before the end of its natural life.

So people with policies maturing in the next few years should not think that they can cash in the policy now and escape future cuts in bonuses. They will always do better by staying in until the end.

If money is tight, most insurance companies will lend you money at pretty competitive rates using the maturing policy as security.

Only 30 per cent of policies reach maturity and the mean penal amount paid to the other 70 per cent has in many cases been used to enhance the returns to those who stay the course.

This year the bonus season coincides with the introduction of new disclosure rules which have at last forced companies to explain exactly where your money goes when it does not go straight into the investment you are buying. So you can see how much is being creamed off to cover expenses and how much of that is used up as a commission payment to the salesman.

All the disclosure is aimed at throwing light on the front end of the policy - the point where it is sold and the charges peeled off.

This is probably the right place to start. But it throws into relief the still-murky area at the other end when policies are reaching the end of their life.

Companies now have to present a "reason why' letter to explain why they recommended a particular product. But there is no question yet of a "why not'' letter to be sent to those who propose cashing in their endowments early.

An explanation of how much they have to sacrifice for cashing in a policy and a look at the alternatives could save quite a number of people from a financial slip-up.

The new freedom to postpone converting a pension into an annuity to provide a lifelong income also throws up the crucial need for advice at the back-end of a policy's life.

Many people do not realise that you do not have to buy your annuity from the same insurance company that you used to save up for your pension. You can already shop around the whole market for the best rate, and choose .to take a level pension or pick a lower starting pension with regular increases or inflation proofing.

Soon personal pension holders will be given the freedom to postpone taking an annuity and take regular cash from pensions savings in the meantime . This will lead some people to switch from old-style self-employed pensions into personal pensions to gain this new flexibility. When it arrives there will be even more need for people to receive proper advice. about the best course of action.

A watchful system of financial regulation will have to lift its eyes from the initial sale and turn its attention to pitfalls along the whole life of investments, and especially the crucial last step when savings are turned into cash or a pension.