This has been a stressful and confusing week for the 650,000 with- profit policyholders of Equitable Life, the beleaguered 238-year- old mutual life assurer that closed for new business last week.
Most policyholders will have heard the news that they are very likely to see a significant reduction in the return on their policy, due to a change in the investment strategy for the with-profits fund that Equitable will be forced to make in the future.
The new strategy was forced on the Equitable when talks aimed at selling it to the Prudential collapsed. The Equitable needed to find a buyer to fund a black hole in its accounts of at least pounds 1.5bn. The money was in turn needed to fund promises of guaranteed annuity rates to 90,000 people.
As a result there will be a reduction in returns for with- profits policyholders of at least 1 per cent per annum. The society is also opting to give policyholders who want to surrender their policy a sum that is less than the value of their investment. It says it will give you 90 per cent of the value of your policy, but this level could decline further.
While news of this penalty has been quick to circulate, prompting many to consider cashing in their policy, experts say it is unwise to make a quick decision. The only group who need to decide quickly are those who took out a policy between 24 November and 8 December. This group can annul the policy without incurring any charges if they state this intention by 22 December.
Surrendering the policy will free you from lower returns; keeping it may cost less in the long run. Which option is best depends on what type of policy you have and how close you are to its maturity date.
With the Equitable's helplines jammed for most of this week, here is The Independent's guide to how the current situation.
I have a with-profits policy. How will I be affected?
As well as seeing a downturn in the return on your policy, Equitable, unlike many other insurers, does not allow you to keep your policy without paying further contributions. So you either have to continue to pay contributions, in the grim knowledge that your investment will pay out less in the future, or you have to cash the policy in and accept that you will only get about 90 per cent of its value.
However, it is important not to be too hasty - to take the money and run to another provider. The key question is how near to maturity your endowment is. Clive Scott-Hopkins of the independent financial advisers Towry Law says: "If you have a 25-year endowment and are within five years of maturity it would be best to hang on as you would loose a considerable sum from surrendering it. But if you are near the start, I would call it a day".
Most of Equitable's pensions are single premium products, which means you pay all the charges up front but then don't have to pay fees when you contribute and are under no obligations to make regular contributions.
The advice on these policies is to hang on to them, as you are not obliged to contribute any more and have already paid your …