It all depends on penalties

Just when battered endowment, pension and with-profits bond holders thought it couldn't get any worse - it did.

Insurance giant Britannic this week caused a major commotion when it told its 1m with-profits policyholders they were unlikely to receive annual bonuses for 2002.

The company said that because of the stock market collapse, it may "defer" its annual bonus payment. It's thought that if it doesn't pay one, Britannic would be only the third company to take such action in more than 50 years.

The first three months of the year is the time when insurers traditionally make their annual bonus declarations, and it was being suggested this week that we will see more dramatic announcements from other companies before the end of March.

So what should Britannic policyholders do? The company says it is confident about the future and people "should definitely stay with us". But some independent financial advisers are not so sure. Chartwell Investment Management says that while it is advising people not to panic, and that it doesn't expect the company to become insolvent, "it would make sense to get your hands on your money if you can do so with no or low exit penalties".

Like many other insurers, Britannic imposes penalties - known as market value reductions (MVRs) - when people surrender or cash in their policies early.

Policyholders thinking about quitting need to check what level of penalty would be imposed. Patrick Connolly at Chartwell says that if the penalty is high, he would probably recommend staying put for the moment. If there was a recovery in the stock market, he would hope the penalties would start to come down.

Britannic's penalties vary from one policy to another depending on when it was taken out. In the case of a policy taken out in 2000, when the stock market was high, the penalty would be "quite large," says Britannic - up to 25%. If the policy was taken out in 1988, the penalty would be low, and there may be some policies where it is zero.

Penalties do not apply where, for example, pension policyholders are retiring and taking the benefits they are contractually entitled to.