Mortgage Endowments - Stick Or Twist?

We read a huge amount of articles on all sorts of financial matters each week. One that appeared in the press recently about the latest news on With Profits Endowment policies' payouts grabbed our attention.

Money Management magazine does an annual survey of policy payouts by various companies, and this years results have shown that yet again most are showing a fall compared to last year.

The background to all this of course is that, particularly in the late eighties and early nineties, Endowment policies were sold alongside interest only mortgages. The policy was supposed to be big enough to pay off the debt after, say, 25 years, and it was commonly said by the salesperson it might give even more than this.

The way in which With Profits policies work is that annual bonuses are added each year (hopefully) and there's also a final bonus at the end of the term, although neither are guaranteed.

Homeowners were informed that it was a way of 'smoothing out' the erratic stock market movements, and the policies also had built in life cover.

It is estimated that something like 2 million policies were sold during this period on this basis, which means that there are many plans due to mature in the next few years.

At the peak, it was estimated that there were 11 million policies, but with many having been cashed in or matured, it leaves around 5 million still active.

Not all companies were included in the survey, however many well known names did appear. So let's look at some results compared with 10 years ago, based on a 29 year old paying in £50pm over 25 years:

Company 10 years ago Now % Fall

Clerical Medical £104,289 £30,561 71

Commercial Union £118,567 £30,679 74

Friends Provident £102,341 £29,966 71

Legal & General £93,678 £35,603 62

Norwich Union £89,518 £27,884 69

Prudential £99,994 £35,834 64

Scottish Amicable £96,569 £37,635 61

Standard Life £110,373 £28,139 75

So if you had a policy maturing in 2000, there is no doubt that you would have done well, having had many years of good growth in the stock market.

But these are very disappointing results for people with this type of policy now, and can be a worry for many who are coming to the end of their mortgage term.

This article also majored on a couple in their early 60s who had taken out a policy with Eagle Star in 1988. The loan was £130,000 and was due to be paid off in 2013. They were worried about the policy, and no wonder. On checking its value last year, they were told it was only worth £50k, which was only £3k more than they had paid in!

On balance, the couple decided to cash in the plan, and downsize.

This gave them enough to pay off the mortgage debt, but left a very nasty taste in their mouths.

It remains to be seen if any companies yet to produce their result will give a lower payout. Apparently, last year, the Life Association of Scotland paid out just £23,785!

Overall, when asked what percentage of policies would fail to meet their targets, the Pru said 75% would fail to do so. The amazing thing here though is that last year they predicted that only 25% would fail...

Standard Life and Scottish Widows both said that around 97% of their endowment policies would fail to meet their targets.

So what should you do if you find yourself in this position?

Well, when we have covered these issues with our clients, the reaction ranges from "we'll make it up from elsewhere" to "this really bothers and annoys me".

The standard options are:

- you extend the mortgage term to repay the shortfall

- pay extra into the loan

- use other savings to make up the shortfall

- downsize the home and use the proceeds to pay off the debt

Some of our clients have been fortunate to have tracker mortgages, and therefore have benefited from low interest rates. In many cases they are paying a third or less of what they were paying each month compared to 2 years ago. So overpaying into the loan has become a very affordable and sensible route to take. Particularly as the next move on interest rates can surely only be up.

Of course, the other side of the coin is that many of our clients have already paid off their mortgage, and now find they have an endowment policy or two that they are still paying into. In this situation it is really well worth reviewing matters, as you can compare the pros and cons of cashing a policy in or sticking it out until the bitter end.

Some issues are, for example, do you need the life cover now and what other investment options are there you could use? What about reducing risk by putting the money into cash?

Another idea is to simply use these monies to fund a special holiday that perhaps otherwise would have to wait?

After all, life is for living!

The Financial Tips Bottom Line

This type of investment has proved to be a poor one in the last few years.

Of course hindsight is a fine thing, but ensure you know what you are investing in if you are looking for a way to save for your future.

ACTION POINT

If you do have an endowment policy, it really is worth reviewing your options. After all, if a plan has, say, 5 years to run at £80pm, you will be handing over nearly £5,000 more to the insurance company.

Find out what the best option is for you, and have the peace of mind knowing that you've made the right decision.