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.

News
newsGlobal index has ranked the quality of life for OAPs - but the UK didn't even make it into the top 10
News
people

Kirstie Allsopp has waded into the female fertility debate again

News
people
News
people
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Life and Style
ebooksA superb mix of recipes serving up the freshest of local produce in a delicious range of styles
Life and Style
ebooksFrom the lifespan of a slug to the distance to the Sun: answers to 500 questions from readers
News
peopleStella McCartney apologises over controversial Instagram picture
News
Gillian Anderson was paid less than her male co-star David Duchovny for three years while she was in the The X-Files until she protested and was given the same salary
people

Gillian Anderson lays into gender disparity in Hollywood

Life and Style
Laid bare: the Good2Go app ensures people have a chance to make their intentions clear about having sex
techCould Good2Go end disputes about sexual consent - without being a passion-killer?
Arts and Entertainment
Swiss guards stand in the Sistine Chapel, which is to be lit, and protected, by 7,000 LEDs
art

The Sistine Chapel is set to be illuminated with thousands of LEDs

Arts and Entertainment
Richard Burr remains the baker to beat on the Great British Bake Off
tvRichard remains the baker to beat as Chetna begins to flake
News
i100
Sport
footballArsenal 4 Galatasaray 1: Wenger celebrates 18th anniversary in style
Arts and Entertainment
Amazon has added a cautionary warning to Tom and Jerry cartoons on its streaming service
tv
News
people
News
The village was originally named Llansanffraid-ym-Mechain after the Celtic female Saint Brigit, but the name was changed 150 years ago to Llansantffraid – a decision which suggests the incorrect gender of the saint
newsA Welsh town has changed its name - and a prize if you can notice how
Arts and Entertainment
Kristen Scott Thomas in Electra at the Old Vic
theatreReview: Kristin Scott Thomas is magnificent in a five-star performance of ‘Electra’
Life and Style
Couples who boast about their relationship have been condemned as the most annoying Facebook users
tech
Arts and Entertainment
Hayley Williams performs with Paramore in New York
musicParamore singer says 'Steal Your Girl' is itself stolen from a New Found Glory hit
News
i100
Sport
Ronaldinho signs the t-shirt of a pitch invader
footballProof they are getting bolder
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs General

    Middleware Support Analyst

    £45000 - £50000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...

    Senior Java Developer/Designer

    £400 - £450 Per Day: Clearwater People Solutions Ltd: My client are looking fo...

    Domino Developer and Administrator

    £40000 - £45000 Per Annum + benefits: Clearwater People Solutions Ltd: Domino ...

    IT Technician

    £26000 - £27000 per annum: Randstad Education Group: Experienced Science Techn...

    Day In a Page

    Italian couples fake UK divorce scam on an ‘industrial scale’

    Welcome to Maidenhead, the divorce capital of... Italy

    A look at the the legal tourists who exploited our liberal dissolution rules
    Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

    Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

    The vintage series has often been criticised for racial stereotyping
    An app for the amorous: Could Good2Go end disputes about sexual consent - without being a passion-killer?

    An app for the amorous

    Could Good2Go end disputes about sexual consent - without being a passion-killer?
    Llansanffraid is now Llansantffraid. Welsh town changes its name, but can you spot the difference?

    Llansanffraid is now Llansantffraid

    Welsh town changes its name, but can you spot the difference?
    Charlotte Riley: At the peak of her powers

    Charlotte Riley: At the peak of her powers

    After a few early missteps with Chekhov, her acting career has taken her to Hollywood. Next up is a role in the BBC’s gangster drama ‘Peaky Blinders’
    She's having a laugh: Britain's female comedians have never had it so good

    She's having a laugh

    Britain's female comedians have never had it so good, says stand-up Natalie Haynes
    Sistine Chapel to ‘sing’ with new LED lights designed to bring Michelangelo’s masterpiece out of the shadows

    Let there be light

    Sistine Chapel to ‘sing’ with new LEDs designed to bring Michelangelo’s masterpiece out of the shadows
    Great British Bake Off, semi-final, review: Richard remains the baker to beat

    Tensions rise in Bake Off's pastry week

    Richard remains the baker to beat as Chetna begins to flake
    Paris Fashion Week, spring/summer 2015: Time travel fashion at Louis Vuitton in Paris

    A look to the future

    It's time travel fashion at Louis Vuitton in Paris
    The 10 best bedspreads

    The 10 best bedspreads

    Before you up the tog count on your duvet, add an extra layer and a room-changing piece to your bed this autumn
    Arsenal vs Galatasaray: Five things we learnt from the Emirates

    Arsenal vs Galatasaray

    Five things we learnt from the Gunners' Champions League victory at the Emirates
    Stuart Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

    Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

    This deal gives England a head-start to prepare for 2019 World Cup, says Chris Hewett
    Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

    The children orphaned by Ebola...

    ... then rejected by surviving relatives over fear of infection
    Pride: Are censors pandering to homophobia?

    Are censors pandering to homophobia?

    US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
    The magic of roundabouts

    Lords of the rings

    Just who are the Roundabout Appreciation Society?