MONEY COMMENT
Tackling Failing Endowments

By Cliff D'Arcy
January 20, 2003

Endowments are very popular products. By popular, I mean that they are very widely held, not that they're attractive products to own!

Around 6m households currently own around 11m policies. Although some were sold as stand-alone savings plans, the vast majority are used to back mortgages.

At their peak in the 1980s, endowments were bought alongside more than 8 out of 10 mortgages (83%). Life companies pushed them extremely strongly, despite their high charges, inflexibility and unsuitability for many borrowers.

However, in the late 1990s, the Financial Services Authority (FSA) decided to investigate the mis-selling of mortgage endowments, which revealed one of the UK's biggest financial scandals.

In theory, the monthly premiums paid into an endowment should, over time, build up a pot of cash sufficient to pay off a mortgage. In reality, thanks to falling investment returns, low interest rates and inflation, few policies will perform as promised.

Millions of us have received "re-projection" letters from our insurers, warning us that our policies won't make the grade. The FSA estimates that around 60% won't grow fast enough to pay off the mortgages they cover.

If you have a traditional "with-profits" policy, you should be concerned that, in recent years, life companies have been drastically cutting the annual bonuses added to your policy. Britannic Assurance (LSE: BRT), with over one million with-profits policyholders, has warned that its customers are unlikely to receive any bonus this year.

Owners of "unit-linked" policies also have fared badly, with falling stock markets hitting the values of the managed funds in which their premiums are invested.

This means that, when our endowments mature and pay out, it's likely there'll be shortfalls that we need to fund. So, what should you do to get your mortgage back on track?

DON'T:

• Act rashly. Don't cancel or cash in your policy (or stop paying premiums) - this could leave you massively out of pocket.
• Ignore the problem. Check with your endowment company how well or badly your policy is expected to perform - is it green, amber or red? You'll need to act if you have a "red" or "amber" policy but you could just wait and see with a "green" policy.
• Increase your endowment premiums or take out a further (top-up) policy to make up the shortfall - you'll simply be throwing good money after bad.
• Increase the life of your mortgage and endowment policy to try to avoid a shortfall, as you may end up paying years of extra interest. You'll probably be better off repaying the debt faster or saving up money elsewhere.

DO:

• Complain if you feel that you were misled or given dodgy advice when buying your endowment.
• Think about increasing your mortgage repayments or using lump-sum repayments to reduce your debt. Be careful: some crafty lenders won't knock these repayments off your debt straight away but will wait until the end of the year!
• Consider switching some (or all) of your mortgage to a repayment basis. Your increased monthly repayments will begin to eat into your debt, reducing the risk of a shortfall.
• Start saving to make up the gap. If your endowment matures fairly soon, you might be better off saving into a cash mini-ISA, a deposit account that pays tax-free interest. For longer-term saving, a stock market-linked shares ISA may provide better returns.
• Visit our Homeowning Centre and take a look at our 60 second guide to endowments for more information.