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Widows pays £1.4bn to GAR holders over Lords ruling

Scottish Widows is shelling out £1.4bn to compensate guaranteed annuity rate policyholders after finding its bonus practice does not comply with the House of Lords&#39 ruling on Equitable Life.

The life office had got round its guaranteed annuity liabilities by offering policyholders often higher transfer values than if they exercised their right to guaranteed rates with Widows.

Even in December 2000, five months after the House of Lords ruling, IFAs were being told its policy of calculating terminal bonuses by taking into account the guarantee was still robust.

But it says the ruling means it “cannot continue with its previous practice of paying benefits with equivalent value to policyholders who opt not to take guaranteed annuity benefits”.

The change in policy will be backdated to January 1999 and final bonuses for most GAR holders will be increased.

The £1.4bn bill will be paid from a separate fund set up when Widows demutualised in March 2000. Policyholders had been expecting an enhanced final bonus from this fund but it is being swallowed up by the GAR costs.

Pensions strategy manager Ian Naismith says: “Our old practice was to take into acc-ount the guaranteed value of the pension when calculating terminal bonuses and give an enhancement for those who took cash. It took a long time to interpret the House of Lords&#39 decision. We have now taken legal advice and must give more value to those who exercise their guarantee.”

The Bureaux director Ronnie Lymburn says: “This is obviously a bit of a turn-round from their previous stance where terminal bonuses were manipulated so that those who stayed got a lower transfer value. They have decided they were not doing it properly after all but they do have the money to sort it out.”

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