Your Money: Why your endowment may not pay off

Fresh doubts emerged this week about whether savings policies will cover mortgage loans. Andrew Verity reports

Millions of savers are this week being warned that they can no longer expect their savings policies to grow at anything like the pace they have grown at in the past.

The warning, which will renew fears that holders of endowment mortgages could be left with significant shortfalls, came from the country's most senior actuaries, the professionals who decide how to share out life insurers' funds.

The Institute & Faculty of Actuaries said payouts - the lump sums paid when endowments mature - can be expected to fall by at least 5 per cent every year as a result. The payouts are crucial to holders of endowment mortgages.

The actuaries say bonuses must fall because they are dictated by long- term trends rather than short-term gains. They argue that double-figure bonuses, reflecting investment returns averaging 17 per cent a year for the past 25 years, are now a thing of the past.

Peter Nowell, chairman of the Institute's life insurance board, says: "In today's economic environment, which is characterised by low inflation and low interest rates, policyholders must understand that pay-outs on life contracts are likely to be lower than in the past."

The actuaries say their expectation of lower growth merely reflects what is believed by the markets. Yields on government bonds, which reflect the outlook for inflation and interest rates, have hit an unusual low of 6 per cent. European monetary union is expected to allow lower inflation without the need for high interest rates.

"Most companies benchmark their annual bonus rates to Government bond yields. If, as is likely, the returns on these securities remain around 6 per cent, then policyholders must expect further cuts in annual bonuses."

The warning contains a grave message for holders of endowment mortgages, who could be left owing a large lump sum on their homes when policies mature.

Endowment holders who were sold policies in the late 1980s - and led to expect rapid growth in their savings - are most at risk of a shortfall.

The table (right) shows what is likely to happen to holders of mortgage endowments who expected good investment returns when they bought their policies.

In 1987, it was common to assume investment returns of 10.75 per cent. Premiums paid to endowments would be sufficient to pay off a mortgage if this assumption was met.

If the actuaries are right and endowments return just 8.5 per cent a year from now on, the 1987 buyer with a 25-year endowment, who assumed investment returns of 10.75 per cent, will be left with a 20 per cent shortfall. If the returns are even lower, at 7 per cent a year, then the shortfall for a buyer who expected 10.75 per cent growth will be up to 35 per cent.

Endowments bought earlier or later than 1987 will be less likely to produce a shortfall, but may still do so. Many may need to top up their policies. Alternatively, more can be saved through another savings vehicle to boost the sum available when the mortgage matures.