People who are using an endowment to pay off their mortgage could now face the prospect of an even larger shortfall, following recent poor stock market performance.

Britain's biggest insurer CGNU is the latest to make cuts in annual bonus payments on its with-profits policies for 2002.

CGNU will cut up to 19% in annual bonus payments on its with-profits savings and pension plans.

The move follows a recent announcement by Scottish Widows to cut bonuses by up to one third.

Uncertainty

"We have taken great care to ensure bonus rates strike the right balance between prudent management of the with-profit fund and also ensuring a fair return to all policyholders, "said CGNU's chief actuary, Mike Urmston.

"The very poor performance of the stock markets has had a direct impact on the value of with-profit funds and this has to be reflected in bonus rates and payouts."

CGNU had projected a return of +7.25% for its with-profits fund last year, but it showed a negative return of -9.6%.

CGNU said that its bonus rates would aim to strike the right balance between prudence and providing fair returns for policyholders.

On the cards

The cuts by Scottish Widows and CGNU are unlikely to be the last - and investors are being warned to expect similar revised projections for bonus rates.

The Financial Services Authority, the City watchdog, issued a warning in December to life insurers not to issue over-optimistic bonus rates.

It is concerned that in the current economic climate - with poor stock market returns and low interest rates - insurers could risk the long-term solvency of the fund and people's savings.

Forced to sell?

Most endowment-holders will have their money in with-profits funds, and about three million homeowners are using endowments to pay off their mortgages.

The news that CGNU has cut its rate could be more bad news for people who are relying on an endowment to pay off their mortgage debt.

If you pay for a mortgage through an interest-only loan, you must find the money to pay off the debt at the end of the term - typically after 25 years.

Endowments have been sold as a way of paying off this debt.

But while for many years endowments performed well, they have come unstuck in recent years because of current market conditions - and overenthusiastic growth projections.

Since the market has fallen, endowment- holders have been faced with an increasing headache over how to pay their debt - or risk losing their home.

Endowment-holders who are concerned about further bonus cuts are being told not to panic, but to act on any shortfall warning.