Your Money: Not necessarily well endowed

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The Independent Online
UNTIL now anyone who opted for an endowment mortgage has come out at the end with a large sum of money - enough to repay the mortgage and still leave a handsome bonus.

But people are starting to notice that having an endowment is no guarantee that there will always be enough in the kitty to repay the loan when it has run its course.

The false sense of security surrounding endowments arose from a comfortable track record and the conservative way that premiums were set.

In the past five or 10 years there has been a switch away from with-profits endowment policies to unit-linked policies, which follow the gyrations of the stock market more closely.

The years since the October 1987 stock market crash have been deeply depressing for equity investment, and unit-linked policies have been caught in the slipstream. Even with-profit policies are having to respond to the harsher times and trim bonuses.

Unit-linked policies are reviewed every 10 years and if an undershoot looks likely, home buyers are asked to increase their monthly premiums.

This is not as horrific as it might sound. The premiums are a fraction of the cost of the interest payments, so a small increase would be less significant than an increase in interest rates, which we have grown (groan) to endure.

With no rosy revival in sight, there is a real possibility of unit-linked policies failing in future to provide the sums needed to pay off the mortgage at the end of the term, unless there are demands for higher monthly payments.

But anyone who took out a unit-linked endowment policy 10 or 15 years ago is looking at a healthy return. Over 15 years, someone on a pounds 30,000 repayment mortgage - where there is no investment element but a steady repayment of capital throughout the term - would have paid out a total of pounds 56,417. A typical low-cost endowment policy with interest payments, with rates averaging 11.9 per cent, would have cost pounds 61,476 - just over pounds 5,000 more. But the policy would have provided a surplus of pounds 33,690.

Traditional with-profits endowments are not usually reassessed because they are so conservatively drawn. But the life companies are substituting hybrid unit-linked with-profits policies.

The element of uncertainty that has crept in - fear replacing greed - means that it would be right to be wary of taking out an endowment in the future.

If we are moving into an era of low inflation and lower returns from investment, this will further dent the attraction of taking on large endowment mortgages. The pain of a large loan will not be eased by inflation, and there will be no bumper returns at the end in compensation.

But the financial advisers - and that includes banks and building societies - who earn commission from endowments and nothing from simple repayment mortgages will still be selling them hard.

The inflexible nature of an endowment should make anyone wary about the wisdom of taking on a commitment that is expensive to unload and may turn out to be a dead weight.

THE Pensions Ombudsman, Michael Platt, produced his first annual report last week. He received more than 2,000 complaints, but many of them were beyond his scope.

He can only act over maladministration - typically delays in producing transfer values - and points of law.

So when it comes to complaints about the way that pensions are sold and marketed, investment decisions or the use of the discretionary powers of the trustees, he is powerless.

He has no compensation fund to soothe the pains of injustice. He can merely order restitution from schemes to aggrieved members. If the fund is bust or has been wound up, it's tough luck.

He does not take a proactive role in preventing or influencing future events. 'I am an adjudicator, not a regulator or a policeman,' he says.

It doesn't sound like a fun job.

WELCOME proposals to allow divorcing couples to split pension rights were put forward by the pensions industry last week.

Pension rights should be valued and divided, with the poorer spouse taking away a portion to buy a pension in her - or his - own right.

A house can usually be sold and the spoils divided, but until now the pension has been an indivisible lump, and a block to the fair division of assets built up during a marriage.

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