Standard Life has cut payouts for 800,000 mortgage and savings endowment policyholders by as much as 9 per cent, the Scottish insurer announced this week.

Poor performance of Standard Life’s £41.2 billion with-profits fund over the past year means that more than half of its 62,700 customers with endowment mortgages that mature this year will not have enough money to cover their home loan when it reaches the end of its term.

Standard Life said that while annual bonus rates would stay the same, the declines in final bonus payouts, an added extra that customers receive when they leave the fund or the policy ends, reflected “challenging” stock market conditions.

A spokeswoman for Standard Life said: “The challenging financial market conditions that took hold in the second half of 2007 have continued into 2008. These have resulted in siginificant falls in value for most type of assets.”

With-profits investments are designed to smooth out stock market volatility over a given period by withholding some cash in years of strong growth and then dipping into the pot in leaner years.

They used to be sold to homeowners with interest-only mortgages as an investment that would grow in value by enough over the term to eventually pay off their loan. However, major shortfalls in payouts have caused a sharp decline in their popularity.

The number of homeowners who will face shortfalls when their policies mature is set to rise from 55 to 87 per cent of all Standard Life endowment holders in future because of continuing poor stock market performance, the insurer said.

Although the extent of the decline will vary depending on when the policy was taken out and how much has been invested, it is understood that some are down by as much as 20 per cent.

Last year, a mortgage endowment policyholder who had paid in £50 a month for 25 years since the age of 29 received a total payout of £38,084. This year, the same policyholder will receive just £34,701.

A customer investing the same amount into a savings endowment plan will receive £35,914 this year, 8.6 per cent down from £39,301 that he or she would have received had their policy matured last year.

Standard Life has a total of two million with-profits investors, with about one million pension holders and 200,000 bond customers.

Hundreds of thousands of endowment policyholders have successfully complained that their endowments were mis-sold, after discovering that they could expect a shortfall.

However, the Financial Services Authority applied a time limit so that only complaints received within three years of the customer first receiving a red letter from their insurer would be consider. Many of the time bars have passed, although consumer groups say it is still worth submitting complaints.

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