Further knock to faith in bricks and mortar: The move to cut endowment policy payouts is not yet a cause for panic. Vivien Goldsmith reports

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The Independent Online
FAITH IN bricks and mortar has been punctured by falling house prices, but not completely deflated - at least for those who can keep paying the mortgage. But the belief that all will turn out all right in the end has been given a further knock by the life insurance companies' decision to cut the payouts on endowment policies.

Someone with a policy maturing this year will in most cases get less than if their policy matured last year. A 54-year-old man who made the final payment on his pounds 30-a-month endowment last year after 25 years of monthly payments would have been paid pounds 60,073 by Norwich Union. But if his policy matures this year, the payout will be pounds 3,078 less.

Cuts of this size are not going to undermine the basis of with-profit endowment policies, but their performance is going to have to be monitored in the same way unit- linked polices are tracked. The value of unit-linked policies varies directly with the performance of the shares, property and bonds that back the fund. With-profits policies are designed to smooth the ups and downs of the market. Each year an annual bonus is added to the policy so the value of the policy builds up gradually. Then at the end of its term a final bonus which can make up between 30 and 60 per cent of the total payout is added.

There is plenty of headroom at the moment before an endowment fails to repay a mortgage. A Leeds building society borrower whose policy matured last year to repay a pounds 30,000 loan would have had plenty of extra cash - pounds 58,430 on a 20-year policy.

The outlook is more serious for those who have taken out pension mortgages and are relying on with-profits pensions to produce enough for a lump sum to repay the mortgage and enough to buy a decent pension. It is hardly surprising that bonuses have been cut. The state of shares and the property market has been grim for several years. The policy of smoothing with-profits policies has delayed the impact.

It was once a point of pride among insurers to produce the biggest pay-outs, but now they are keen to show their toughness in cutting returns and preserving the financial strength of life insurance operations. So investors should ask about the state of the business as well as the level of payouts.

Endowment policyholders should not panic, but should keep checking to ensure they are on track to repay their mortgages, or they may find they have an unexpected debt in old age. New homeowners should think twice about bowing to the pressure to take on an endowment policy.

House prices fell again last month, making an annual drop of 8.4 per cent. According to the Nationwide building society prices dropped by 0.2 per cent in December. The average UK house price fell by pounds 97 to pounds 51,862.