`Personal Finance: The important thing for endowment holders is, as the FSA stressed this week: Don't panic'

LIKE SHOULDER-PADDED suits and Rick Astley, endowment mortgages were hugely popular in the 1980s but are now almost universally reviled. As interest rates and inflation have fallen to 30 year lows, there are fears that many endowment policies will not grow fast enough to pay off the home loans they are linked to.

This week the prospects for endowments appeared to get even bleaker, as Tony Holland, the Ombudsman for the Personal Investment Authority (PIA), declared that anyone who was sold such a mortgage without being warned of the risks was entitled to compensation.

At first Mr Holland's words, uttered on BBC Radio, seemed to suggest that endowments will follow personal pensions as the subject of a multi- billion pound drive for compensation. The PIA was quick to point out that he was merely restating its position that endowments are inherently more risky than repayment mortgages, and that if this is not explained to borrowers, there may have been a mis-sale, which in turn could give rise to compensation.

This payback would consist of the premiums paid plus interest.

But this is a long, long way from the Government-supported, industry- wide action over pensions miss-selling. Much of the problem is that Mr Holland's words came hard on the heels of warnings from the Institute of Actuaries, which declared that many people will need to increase contributions to their endowment policies.

It was left to the Financial Services Authority (FSA) to damp down the rising panic, by urging people to look very carefully before ditching their endowments. Cashing in your policy is one of the most damaging things you can do.

After all, your contributions will have already paid off the huge commissions that the salesmen take from the policy in the first few years of its life. But the policy will not have benefited from the compound growth of the shares it invests in. So if you are worried about it, write to your lender, or get your IFA to do so, to get an update on how the policy is growing.

An alternative, very popular this year, is to remortgage. You can switch to a repayment mortgage and keep the endowment policy going separately, in effect as a long-term savings policy. You will still get the "uplift" of the last few year's of the policy's growth, but you won't have the worry of whether that growth will definitely pay off the mortgage.

Also, if you are advised that your endowment may fall short, switching to a repayment may be a much better route than "topping up" your existing endowment.

The important thing for existing endowment holder is, as the FSA very sensibly stressed this week, "Don't panic."

If you are still worried, why not contact the FSA direct. The FSA operates a Consumer Helpline on 0845 606 1234. It produces a range of user-friendly fact sheets available from their leafletline on 0800 917 3311. Or try the FSA website on http://www.fsa.gov.uk. The leaflets include the FSA guide to making a complaint, the guide to ISAs and the guide to financial advice.

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