Personal Finance: Endowments may not be dead yet

But if you have a doomed endowment mortgage there are still many ways you can mitigate the effects of a policy that may not pay off the final debt on your home, says Hilaire Gomer

YOU MAY have read last week that the endowment mortgage is dead. The Faculty & Institute of Actuaries working party issued a short, jargon- free report on the future of endowments, saying endowments are, generally speaking, not worth the candle compared with the repayment mortgage.

At one point, 80 per cent of mortgages were linked to an endowment. These days new endowment mortgages account for around a third of the total as the public has slowly become aware of the shortcomings - unreliability, inflexibility and the expense. Soon that third is likely to be halved, says John Jenkins of the Institute of Actuaries.

Ten years ago, a combination of a tax break on premiums, MIRAS tax relief, high interest rates, higher dividends and inflation softened the impact of expensive, front-end loaded policies. For thousands endowments seemed, and indeed were, a good idea. The opposite is true now. A low inflation and interest rate environment suggest hundreds of thousands of endowment policies will not grow at their once-projected rate and won't be able to pay off the loan at the end of the policy.

Many will have to pay an extra pounds 250 a year to help bridge the gap. The actuaries say 1.3 per cent reduction in yield or RIY was an acceptable maximum rate but only 25 per cent of policies are within this.

The Association of British Insurers say policy holders were made aware of the possible dangers of an endowment being unable to deliver because of the uncertainties of the stock market.

They claim that insurance companies "have broken no promises" and the cost of mortgages has come down in the Nineties. They feel this has more than compensated for any possible shortfall.

Sadly, the actuarial working party did not concern itself with those already with endowment mortgages, concentrating on what guidance there should be for future buyers.

For those, in comparison with the simplest and financially safest method of repayment - the interest and capital repayment mortgage - an interest- only endowment mortgage might be considered as good if:

It has a term of 20 to 25 years. Ten to 15 year endowments are not as good as the repayment equivalent

The costs of the policy need to be kept low

A policy is assessed on the basis of 6 per cent growth a year, rather than the 8 to 12 per cent traditionally quoted and compared with a repayment on the same basis

An endowment could be taken out only by those who take an optimistic view of the stock market during the term of the policy (where 80 per cent of an endowment's sums are invested)

Anyone taking on an endowment must realise it risky, along with other vehicles it might be attached to, such as an ISA tracker fund.

Make any decision in close liaison with an established independent financial adviser, because he may be needed ten years down the line.

But what about endowment policy holders who may discover the policy will need to be supplemented? What can they do to mitigate their problem?

First thing is not to panic. Do not surrender or sell your policy.

Contact your life office and/or your IFA. If you haven't got one, acquire one.

Ask an IFA if you get one of the dreaded letters from a life office informing policyholders their policy has a projected shortfall and they need to pay so much extra a month. Life offices don't give advice, and they will say they don't know enough about the policyholder's personal circumstances to give useful advice. Your policy may not be due a review so if you haven't got a letter and want to know what the situation is, again, contact your broker.

It is unwise to surrender an endowment because you always lose out. Selling it on the second-hand market at a premium to surrender value of 10 to 20 per cent is an option. But find out how this figure compares with a repayment mortgage at the same point using the actuarial working party's 6 per cent growth to give an idea how much you are losing.

There are a number of options your IFA may discuss. First he should assess the amount of risk you are comfortable with, and the extent of your other investments and savings. He may suggest:

1. You top up your premiums to the required amount with other monies, perhaps accumulated from having to pay less in mortgage repayments due to lower interest rates. It may be possible to persuade the broker not to charge for this.

2. You might like to set up a (preferably) low-cost investment ISA, perhaps tracking the share index, which should grow to pay the shortfall.

3. If you can afford it, you may decide to scrap the endowment as a repayment vehicle but keep it for its savings and life and insurance function and switch to a repayment mortgage.

4. You may decide to do nothing at all for the moment and pay the difference from various sources when the time comes. If your pension is released at the same time as the mortgage finishes you could ear- mark funds from the pension to pay off the shortfall.

Remember, no one knows the ultimate worth of an endowment policy. For most policyholders they have ten to 15 years to run so there is plenty of time sort work out a solution.

Bear in mind that higher interest rates and dividends may return, terminal bonuses may be better than projected and the problem may shrivel and even disappear.

one endowment case study

Peter Jackson, 41, an insurance special investigation unit manager, or to you and me a fraud officer, lives with his second wife Marion and their two children Simon and Emma in a dormitory village called Deeping St James, north of Peterborough. In 1991 he was setting up home with Marion and bought their house for pounds 70,000. It is now worth pounds 90,000.

PETER JACKSON explains: I was offered an endowment mortgage by a perfectly adequate one-man band independent adviser. I was in difficult circumstances, given that I had a mortgage already, and the impression I got was if I took a 20-year Axa endowment policy he'd see I got another mortgage. He obviously had a good commission arrangement with Axna. But I was happy with that.

Anyway, abut two years ago I got my first letter from Axa telling me that my policy was running below long-term projections and I needed to start supplementing my payments by pounds 20 a month. I didn't feel particularly alarmed by this development, because it's still got a long way to run.

We are in fact moving house and my current IFA said I could do a repayment, an ISA endowment or an endowment. He said the ISA was medium-risk, the endowment was low-risk and he said nothing at all about the repayment. He did say the actual performance of my Axna policy is absolutely fine and I should have no problems in meeting its maturity target.

On this basis, I reckon that there is no real evidence not to go for an endowment again. I think one of the problems is that the regulators insist the industry revalue all their policies on the basis of a lower projection percentage rate, regardless of what is going on in the market. They create the problem in a sense, but I realise their job is to be very cautious.

I am not the sort of person who has sufficient excess funds not to worry about having a supplementary payment on my endowment. I would be very worried indeed if the demand was a large sum each month because we live pretty carefully, given the fact of alimony. But I feel confident I haven't got a problem with my policy and I'd say to others to find out how their policy is really performing before deciding to make any big change.

Barn owls are among species that could be affected
charity appeal
Sarah Silverman (middle) with sister Reform Rabbi Susan Silverman (right) and sister actress Laura Silverman (left) at Jerusalem's Western Wall for feminist Hanuka candle-lighting ceremony
peopleControversial comedian stages pro-equality Hanukkah lighting during a protest at Jerusalem's Wailing Wall
Arts and Entertainment
The Bach Choir has been crowned the inaugural winner of Sky Arts’ show The Great Culture Quiz
arts + ents140-year-old choir declared winner of Sky Arts' 'The Great Culture Quiz'
After another poor series in Sri Lanka, Alastair Cook claimed all players go through a lean period
cricketEoin Morgan reportedly to take over ODI captaincy
Have you tried new the Independent Digital Edition apps?
Life and Style
ebookNow available in paperback
Life and Style
ebooksA superb mix of recipes serving up the freshest of local produce in a delicious range of styles
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs General

    Recruitment Genius: Finance Director

    £65000 - £80000 per annum: Recruitment Genius: Finance Director required to jo...

    Recruitment Genius: Medico-Legal Assistant

    £15000 - £25000 per annum: Recruitment Genius: This is a unique opportunity fo...

    Ashdown Group: (PHP / Python) - Global Media firm

    £50000 per annum + 26 days holiday,pension: Ashdown Group: A highly successful...

    The Jenrick Group: Quality Inspector

    £27000 per annum + pension + holidays: The Jenrick Group: A Quality Technician...

    Day In a Page

    Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Could cannabis oil reverse the effects of cancer?

    Could cannabis oil reverse effects of cancer?

    As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
    The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

    The Interview movie review

    You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
    Serial mania has propelled podcasts into the cultural mainstream

    How podcasts became mainstream

    People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
    Jesus Christ has become an unlikely pin-up for hipster marketing companies

    Jesus Christ has become an unlikely pin-up

    Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
    Rosetta space mission voted most important scientific breakthrough of 2014

    A memorable year for science – if not for mice

    The most important scientific breakthroughs of 2014
    Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

    Christmas cocktails to make you merry

    Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
    5 best activity trackers

    Fitness technology: 5 best activity trackers

    Up the ante in your regimen and change the habits of a lifetime with this wearable tech
    Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

    Paul Scholes column

    It's a little-known fact, but I have played one of the seven dwarves
    Fifa's travelling circus once again steals limelight from real stars

    Fifa's travelling circus once again steals limelight from real stars

    Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
    Frank Warren column: 2014 – boxing is back and winning new fans

    Frank Warren: Boxing is back and winning new fans

    2014 proves it's now one of sport's biggest hitters again
    Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

    Jeb Bush vs Hillary Clinton

    Karen Tumulty explores the power dynamics of the two first families
    Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

    Stockholm is rivalling Silicon Valley

    The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
    Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

    Crucified Santa: Urban myth refuses to die

    The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
    Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

    The Boy in the Dress: On set with the stars

    Walliams' story about a boy who goes to school in a dress will be shown this Christmas