Selling Endowments

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Misery as endowments plummet- losses hit millions of homeowners

Mirror online newspaper 3/3/2009

More than 300,000 homeowners due to clear their mortgage debts this year are facing shameful shortfalls.

And some five million more people will suffer a similar fate in the next few years as a result of monstrous mis-selling of with-profits endowment policies.

The big insurers have all revealed shocking with-profits figures in the past few weeks.

Bonuses have been slashed as turbulent markets hit returns.

Millions of people were suckered into taking out these disastrous policies in the 80s.

The savings plans were supposed to generate enough cash to repay the home loan. Commission-hungry sales staff even promised that people would end up with huge bonuses.

But anyone taking out a 25-year mortgage endowment in 1984 is now facing an Orwellian nightmare. The policies are in freefall – just when people are relying on them.

“Insurers were desperate to attract new customers in the 80s and ended up inflating bonuses to get to the top of the payout tables,” says investment expert Tom McPhail, of Hargreaves Lansdown.

“There was an arms race going on but they knew the payouts weren’t sustainable.”

The schemes reached the peak of popularity 25 years ago, just before the Government scrapped tax relief on them. A rush to beat the end-of-tax-year deadline in 1984 saw the number of policies taken out almost treble from 150,000 to 500,000. At the height of endowment fever in 1988, a million were sold. The problem is that most with-profits endowments were mis-sold with claims of huge bonuses for savers. In fact, most will barely pay off the loan. “The policies were a gravy train for building societies and salespeople,” says McPhail.

“There was no City watchdog in those days and inflating the potential returns made them look a much better prospect than a repayment loan.

“They were made to look cheaper and appeared to offer much greater payouts.” The widespread mis-selling of the policies left millions of homeowners being forced to take emergency action to prevent being left with a huge debt around their neck.

Ten years ago, insurers – who run the with-profits funds – were forced to admit that things hadn’t gone to plan. Since then the City watchdog has made them send out millions of “red” letters warning savers that their fund is not performing and that they must make other plans to pay off their loan.

But anyone cashing in now faces a worse payout than ever. Funds that would have paid out around £100,000 for a 25-year £50 monthly investment eight years ago are now paying out less than a third of that.

In the past year alone, returns have been slashed by up to 20 per cent - leaving some savers getting £2,000-£3,000 less on average than they would have just 12 months ago despite paying in an extra £600. In fact, anyone putting the same amount in a standard deposit account would hardly have done worse.

Savers with the big insurance names are all at risk – although some are worse off than others.

Sadly, just 4,000 people will benefit.

Facing a shortfall? What can you do?

You can keep the endowment going but put extra cash into another savings scheme. A cash ISA, for instance, will help your savings grow tax-free without risk of being hit by further stock market crashes.

You could switch all or part of your mortgage to a repayment loan. That way you will know that your repayments will cover the cost of the mortgage.

You could make the endowment policy paid up which would mean making no more payments. Instead you should use the cash you would have put in to make extra payments on your mortgage.

Cash-in or sell your policy now. Get a surrender value from your insurer and then talk to a second-hand endowment seller to see if you can get a better deal.
 

You could get more money for your endowment policy by phoning this number - 0800 072 1972 - or by clicking this link here.

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