Money: It's the way they sell 'em

Endowment mortgages themselves aren't the real problem, says Isabel Berwick

If someone told you about an investment that's returned an average growth of 12.5 per cent a year - over the last 25 years - then you might be interested. This miracle investment does exist - and it's called an endowment policy.

Surprised? If you took out an endowment investment scheme as part of a mortgage back in the early 1970s, it'll probably be maturing about now. And you'll be sitting on a tidy pile of cash, that will have paid off anything you owe - with some to spare.

One reason is that all endowments taken out before 1984 still get some tax relief. The high-inflation, high-interest-rate climate of the 1970s and early 1980s favoured with-profit endowments: in these schemes, insurers pool their policy holders' cash in a range of shares and fixed-interest investments. Each year you get a fixed bonus based on what "profit" the fund's made. And at the end of the term (usually 25 years) there's a hefty terminal bonus. Even the last few years' lower annual bonuses have not dampened overall performance for older policies.

The picture is very different for those who've taken out an endowment mortgage in the last 10 years. Low interest rates, no tax relief on endowments and a gradual removal of tax relief on mortgage interest (Miras) means it makes sense for many to pay off the loan via a repayment deal, rather than an interest-only deal over 25 years.

A survey last weekend suggested that more than 500,000 people may have to "top up" their endowments with an extra pounds 50 a month or more to make enough to pay off their loans. These "top ups" have been triggered by rules changes made by the regulator, the Financial Services Authority (FSA). Until last summer insurers could send out statements showing how much your policy might make if it grew by double digits each year. Most have now reduced that projection, on FSA orders, to 6 per cent a year.

If interest rates rise dramatically or if with-profits funds start to perform better, your endowment will pay out more on maturity. Some in the industry believe things can only get better, and your policy may well pay out a lot more than projections are allowed to show.

The booming market in "second-hand" endowments shows the value that investment buyers, both private and professional, put on such unwanted policies - something the sellers may not always be aware of.

Any potential mis-selling investigation will be focused on the way these contracts have been pushed by commission-hungry advisers. Tony Holland, the Personal Investment Authority (PIA) Ombudsman, believes borrowers have a case for a return of their savings, plus interest, if they were not told that taking out an endowment is intrinsically riskier than a straightforward repayment home loan.

You can see how much salesmen make from these policies by comparing the charges made by a discount broking firm, which doesn't take commission payments. Patrick Connolly, at Chartwell Investment Management, sells endowment policies on an execution-only basis (meaning the firm gives no financial advice) to home buyers for a flat fee of pounds 75. "On endowment policies the big problem is charges - by charging pounds 75 we can re-invest the commission and charge payments into the policy. On a typical pounds 150 a month endowment, that means pounds 1,200 goes back into the policy right away. Typically, on an endowment that money is taken out over the first three years."

People's lives have changed radically since the 1970s, with flexible working patterns, frequent house moves and a high divorce rate. Endowments don't fit into this world. You have to keep paying the premiums for the whole 25 years - or sell up and face a much reduced return.

The Halifax, the UK's biggest lender, stopped selling endowment mortgages in 1995 (it was previously an agent for Standard Life). Bank spokesman Mark Hemingway says: "The word endowment doesn't mean it's a bad thing, but the market- place has moved on and people want flexibility."

It looks like the insurance companies are going to have to dream up something else to sell us in the 21st century.

n The FSA has a leaflet about endowments. Call 0800 917 3311 or you can find it online at


What to do if your policy isn't performing

The insurer may suggest you "top up" premiums. Check if there are any extra charges involved. If so, don't bother. You have paid through the nose already.

Instead of throwing more money into the endowment you could take out a tax-free ISA stock market fund and save that alongside your endowment. Use the proceeds from the ISA to make up any endowment shortfall.

Other options include converting part or all of the home loan into a repayment deal. Then use the endowment as an investment policy. Speak to your lender about how to do this.

A model of a Neanderthal man on display at the National Museum of Prehistory in Dordogne, France
Richard Dawkins dedicated his book 'The Greatest Show on Earth' to Josh Timonen
newsThat's Richard Dawkins on babies with Down Syndrome
Arts and Entertainment
Eye of the beholder? 'Concrete lasagne' Preston bus station
architectureWhich monstrosities should be nominated for the Dead Prize?
ebooksAn evocation of the conflict through the eyes of those who lived through it
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.

iJobs Job Widget
iJobs Money & Business

AIFMD Business Analyst / Consultant - Investment Management

£450 - £600 per day: Harrington Starr: AIFMD Business Analyst / Consultant - I...

Business Analyst Solvency II SME (Pillar 1, 2 & 3) Insurance

£450 - £600 per day: Harrington Starr: Business Analyst Solvency II SME (Pilla...

Manager - SAS - Data Warehouse - Banking

£350 - £365 per day: Orgtel: Manager, SAS, Data Warehouse, Banking, Bristol - ...

SQL DBA/Developer

£500 per day: Harrington Starr: SQL DBA/Developer
 SQL, C#, VBA, Linux, SQL Se...

Day In a Page

Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

'Lack of ethnic minority and black faces on TV is weird'

Culture Minister Ed Vaizey calls for immediate action to address the problem
Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

Josephine Dickinson: 'How I discovered a new world of sound'

After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

Greggs gives lesson in crisis management

After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

Matthew McConaughey sings the praises of bumbags

Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
7 best quadcopters and drones

Flying fun: 7 best quadcopters and drones

From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
Joey Barton: ‘I’ve been guilty of getting a bit irate’

Joey Barton: ‘I’ve been guilty of getting a bit irate’

The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
Andy Murray: I quit while I’m ahead too often

Andy Murray: I quit while I’m ahead too often

British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home
Lauded therapist Harley Mille still in limbo as battle to stay in Britain drags on

Lauded therapist still in limbo as battle to stay in Britain drags on

Australian Harley Miller is as frustrated by court delays as she is with the idiosyncrasies of immigration law
Lewis Fry Richardson's weather forecasts changed the world. But could his predictions of war do the same?

Lewis Fry Richardson's weather forecasts changed the world...

But could his predictions of war do the same?