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The with-profits bonus strategy

A recent report suggests that two-thirds of people receiving endowment shortfall letters are doing absolutely nothing.

No surprise there – but what about the remaining one-third? Are some of these people being pushed in the wrong direction?

These projections take no account of terminal bonuses, which could well come to the rescue as the shining knight doing battle with that nasty shortfall, leaving the policyholder with a modest surplus rather than a gaping hole.

This got me thinking even further. What has become of the traditional with-profits bonus strategy? When I first got into financial services in the 1970s, terminal bonuses declared by my life office employer were around 25 per cent of annual bonuses.

My current mortgage-linked with-profits endowment with that same reputable life office is projecting a terminal bonus, for my particular policy, of 260 per cent – and this is after a bear-run cutback.

Is this the sort of policy that people thought they were buying two or three decades ago? The highly geared impact of terminal bonuses is probably keeping the actuarial fraternity ecstatic but we are in danger of turning the traditional with-profits into a heavily disguised pseudo unit-linked policy.

The so-called smoothing effect of bonuses is now about as smooth as a regulator&#39s bottom. Do I sense another misselling issue here or has the new head of the FSA got enough on his plate?

Michael Lindsey

Leighton Buzzard, Bedfordshire

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