Royal & SunAlliance is the latest insurer to announce cuts to its annual bonus rates on with-profits...
Royal & SunAlliance is the latest insurer to announce cuts to its annual bonus rates on with-profits products but as much as 50% in some cases.
Annual bonus rates for unitised with profits bonds and other unitised life policies taken out after 1 August 2000 will be reduced by 50% from 3% to 1.5% on 1 March 2003.
Policies issued before August 2000 will also see a drop in the annual bonus rate from 1.5% to 1%.
The annual bonus rates for unitised pension policies taken out after 6 April 2001 will be slashed from 4% to 2.5%. Policies taken out before that date will also be effected and cut from 3.5% to 2%.
To illustrate the effects of the rate cuts, imagine a £10,000 investment made into a unitised with profits pension on 1 January 1995. Although the fund value would have risen to £16,820 by 1 January 2003, a similar 8-year fund that is cashed in a year earlier would have raised £17,842.
Likewise the surrender value of a £10,000 with profits bond taken out 5 years ago would have been £10,961 on 1 January 2003 - as opposed to £13,865 at the same time a year earlier – representing a total growth of 9.6%.
But RSA is quick to draw comparisons with the benchmark FTSE 100 which over the same period fell 23%.
The Market Value Reductions rate – an exit penalty which increases in times of economic downturn - is usually a telling sign of the state of the markets. In January 2002 the MVR average rose from 9% to 14% in December 2002.
Conventional with profits annual bonus rates also face cuts as outlined in the table below.
|Conventional with profits annual bonus rates|
|Issuing Company||Annual bonus on sum assured/attaching bonus|
|Royal & SunAlliance Life & Pensions||2003 (%)||2004 (%)|
|Sun Alliance & London Assurance Co||2003 (%)||2004 (%)|
Like other insurers that have slashed bonus rates, RSA says that the rate cuts were necessary due to the difficult market conditions.
"To reflect the low returns earned relative to the minimum guaranteed returns underlying most with profits policies, it has been necessary to reduce rates of bonus," says RSA chief actuary Mike Kipling.
The RSA is currently trading down 1.75p to 102.25p.
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