11:30am Tuesday 17th August 2010
By Jeremy Gates »
IT’S more than 20 years since I took out a third and final endowment policy which guaranteed to pay off part of the mortgage for my wife or myself, in case either of us was hit by a bus – and I haven’t followed its progress too closely.
As my policy – moved from Scottish Amicable to Prudential in 1997 – pays only £11,000 in the event of death, I wasn’t too worried when the endowment mortgage scandal broke in 2002.
After all, the Pru is one of the more successful providers of with-profits policies which hold a range of assets, shares, bonds, property and fixedinterest securities to protect and grow savers’ money through the worst financial storms. But when my annual statement arrived the other day, I had a shock.
My policy with the Pru has grown over 21 years into a lump sum worth only £6,477 – barely half the amount it is supposed to protect.
Each year I pay £255, by monthly direct debit, into the policy, and this year it grew in value by only £67. Yet some managed funds, which hold shares, rose in value by 30 per cent-plus on the back of the big share bounce-back in 2009-10.
If the annual bonus on my policy maintains the current rate to maturity, I will pay a total of £6,375 by 2014 to get £6,700 back – plus any terminal bonus the Pru can afford.
It is a return I could nearly have beaten by leaving the money under the bed. Building society accounts have left it miles behind.
Insurers mostly blame the plunge in inflation for this collapse in endowment payouts.
Policies maturing today were sold in the late Eighties, when inflation was roaring and financial advisors told customers their funds could grow by ten per cent a year.
But the wretched performance of my fund has huge implications for many near the end of mortgage repayments.
About 4.9 million of the 11 million mortgage endowments originally sold are still active, many with customers who chose interest-only monthly repayments on the assumption their endowment would eventually pay off their outstanding debt.
Although shares and property values have both soared since my policy began in 1989, there is little left in the pot for me to collect – and my experience is pretty typical.
Danny Cox, a financial advisor at Hargreaves Lansdown, says: “The problem is that with-profits providers have been applying bonuses at too generous a rate, compared to the actual underlying asset value of their funds.
“As terminal bonuses are cut back, or cancelled altogether, the probability is that somebody with a policy maturing today gets a larger sum than another policy maturing in a year’s time, though the second policyholder has to pay in more money.”
Cox’s advice to endowment policyholders, like me – within sight of their maturity date – is to stick at it, unless they need cash for other things.
“Things could look brighter four or five years from now,”
he says.
Alternatively, they can cash their policy in with the provider, losing any chance of a terminal bonus and possibly seeing their lump sum cut by the market value reduction.
They can also stop payments and make the policy “paid up”, so it matures with a smaller sum. Before doing so, they should ask their insurer what penalties and charges this involves.
In theory, they could also try to sell their policy on the Traded Endowment Policies market.
One other possibility is to consider action against the policy provider on the grounds they were mis-sold.
From The Northern Echo, published on 11:30am Tuesday 17th August 2010
