Fresh bonus blow for endowment holders

With more bad news on the way, Alex Hawkes sees what homeowners can do to ensure their loan is paid off

Norwich Union, one of the big guns of the with-profits sector, will unveil its policy bonuses in the next 48 hours. It is traditionally one of the first major life firms to tell policyholders by how much - or how little - the value of their endow- ment, bond or pension has grown over the past year.

Norwich Union, one of the big guns of the with-profits sector, will unveil its policy bonuses in the next 48 hours. It is traditionally one of the first major life firms to tell policyholders by how much - or how little - the value of their endow- ment, bond or pension has grown over the past year.

These funds typically "smooth" your investments by holding back gains made in good years to ride out the bad.

However, the "bonus season" has recently turned into a misnomer, and homeowners with endowments will be watching nervously. After the bear market in shares destroyed much of the value of with-profits funds, that blow was compounded by life assurers selling off equities to comply with solvency rules. All in all, policyholders have very little to cheer about.

The annual bonuses - a sum reflecting the growth rate of the funds and added each year to your policy - have in most cases either been cut or failed to materialise. And since millions of borrowers depend on these bonuses to boost policies taken out to pay off endowment mortgages, they face shortfalls of thousands of pounds at the end of their home loan's term.

Sadly, this year's bonus announcements are expected to offer little relief. Axa Equity & Law has already revealed it is halving the annual payments on its with-profits policies to 1 per cent from this month; about 50,000 with-profits endowments and pensions will be affected. And this gloomy scenario is expected to be repeated across the industry in the coming weeks; Standard Life is to report in early February.

"Generally, I would expect bonuses to be down again this year, and down next year too," says Patrick Connolly of independent financial adviser (IFA) John Scott & Partners. "Firms are still paying out more than their funds have produced."

A negligible bonus means negligible policy growth, so borrowers who have received projection letters highlighting a shortfall need to consider how to bridge the gap between the cost of the mortgage and the value of their endowment.

Melanie Bien, associate director at Savills Private Finance broker, advises against investing more in your current endowment policy: "The worst thing you can do is throw good money after bad. If the policy has under-performed so far, there is no guarantee that it won't continue to do so."

A far better option could be to remortgage all or part of your interest-only deal to a repayment home loan, she says. This will result in higher monthly repayments but will chip away at the capital value of your house.

Alternatively, you could try to sell your endowment on the Tep (traded endowment policy) market; you will often get more than simply cashing it in with your insurer. Register with the Association of Policy Market Makers (www.apmm.org) and it will scrutinise the deals on offer.

It's essential to visit an IFA first, however, to work out how to build up replacement savings.

Ian Driscoll and his wife Linda, who live in Preston, have sold a Prudential endowment policy from 1990 through a Tep company, Robin Lloyd, and cashed in two others from 1997 with Legal & General and Royal & SunAlliance. Projection letters for all three showed considerable shortfalls for maturity in 2015, and so they remortgaged to a full repayment deal - at a cost of an extra £240 a year.

Many endowment holders may feel they have a claim for mis-selling. If so, the point must be not only that you face a shortfall but that such a likelihood was not properly explained to you at the start.

Complaints must first be directed at the firm that sold you the endowment, says Tereza Fritz at consumer body Which?. Unfortunately, many companies are not handling claims appropriately, reports the Financial Services Authority (FSA). They are rebuffing complaints that are then handled and upheld by the Financial Ombudsman Service.

As many as five million people may have been mis-sold endowments, says Which?. If you think you may be one of these, act quickly; many lenders have imposed time limits on claims.

www.which.net/endowmentaction; www.financial-ombudsman.org.uk

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