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Crippling legacy of endowments revealed,,,

 

Payouts on endowment policies have crashed by 75% since the late Eighties and early Nineties when most were sold, according to Money Mail research.

Failure: The majority of endowments will not cover the accompanying mortgage.

The research lays bare the desperate failings of these investments, which have blighted a generation of homeowners.

Millions were sold in a commission-driven frenzy without regard to the risks they posed. More than 250,000 will pay out this year followed by another two million over the next five years.

Throughout the Nineties, many policies paid out more than £100,000 to homeowners who had saved £50 a month for 25 years — some paid as much as £120,000. Now most pay less than £30,000 and some little more than £20,000.

The vast majority won't produce enough to pay off the mortgage they were supposed to cover. Homeowners have been forced to pay extra each month on their mortgages, divert savings from elsewhere or carry on working past their planned retirement date.

Aviva warns that only 2% of its 63,000 mortgage endowments maturing this year will reach their target.

At Standard Life, 42,000 out of 44,000 policies will have a shortfall. Friends Provident warns 93% of policyholders can expect a shortfall, while at Axa Sun Life the figure is 71%.

With-profits endowments were sold alongside interest-only mortgages. Sales peaked between 1988 and 1992 — policies which will start maturing from now.

Homebuyers were promised their mortgage would be repaid and they'd get a tax-free lump sum on top. They were told their money would grow as guaranteed annual bonuses were added to their savings, and at the end of the policy's term they would get a large 'terminal' bonus.

  ›› See how payouts on your endowment have plunged...

 

Insurance companies said they would set aside some profits from the good years to smooth out returns when investments underperformed.

Instead, investors have experienced a headlong dive as payouts have plummeted since the turn of the century. When these policies were sold, endowments were giving returns of 13% a year; now some give less than 4%.

At Standard Life, a benchmark 25-year, £50-a-month with-profits endowment has slumped from more than £110,000 at its peak to less than £29,000 today.

A 25-year Norwich Union endowment — owned by Aviva — pays £25,253 compared with £28,325 last year and £100,247 as recently as 1998. This represents a return of just 3.9% a year.

A General Accident policy — also now owned by Aviva — will pay out £33,937, 8% less than a similar policy last year. At its peak, GA paid out £120,809, figures from Money Management magazine show.

At Friends Provident, payouts rose by 4.6% last year, against a 13% rise in the fund. But the £31,374 value compares with a peak in 1992 of £106,948.

Savers have more than £330bn tied up in these funds, which can lock your money up for up to 35 years and levy hefty penalties if you want to get out early.

Investment specialist Patrick Connolly, of adviser AWD Chase de Vere, says: 'It seems that, almost regardless of investment performance, with-profits funds are still paying for mistakes they have made in the past. We can expect further reductions in bonus rates and payouts in the coming years.'

He adds: 'Aviva's with-profits investors are in a much stronger position than with-profits policyholders with many other companies because it has a relatively large proportion of its fund investing in .'

Insurance companies have committees that are supposed to protect policyholders' interests over issues such as deciding how much to award in bonuses.

But a report from City watchdog the Financial Services Authority last year raised fears that some committees were failing, saddling investors with paltry bonus rates and inflated charges.

With-profits funds face another obstacle: financial regulations force them to adopt a more cautious approach if they pay large annual bonuses, which are guaranteed, to policyholders.

Last week, Standard Life said it was freezing or cutting annual bonuses to allow it to invest more of the fund in shares.

At Aviva, annual bonuses were kept at the same level as last year even though its £49bn fund grew by 12%. Prudential, Legal & General and Scottish Widows will announce their payouts soon.

However, the worst could yet be to come. The Phoenix Group controls a range of funds which are closed to new savers, many of which have little money invested in shares. These include Pearl, Phoenix, Scottish Mutual, Scottish Provident, Royal Life and Royal Sun Alliance.

›› See how payouts on your endowment have plunged...

If you have an endowment shortfall, you have limited options. These are:

• EXTEND your mortgage term to repay the shortfall;

• CONVERT part of your loan to a repayment mortgage and pay extra to your lender while interest rate are low;

• SET up another savings plan such as an Isa — not with your insurer — to cover the shortfall.

• DO NOT take another endowment or increase payments to your existing one because the insurer will take yet more charges.

'I was let down so badly'

John Parker, 68, was expecting to receive at least £45,000 from the endowment he was sold in October 1990. It was set up to run for 23 years and is costing him £77 a month.

John Parker

Now, Aviva has told him that at this stage the policy is on track to pay out just £26,700 — even though he will have paid in £21,252. Endowments were regularly sold to run beyond housebuyers' retirement age.

Another problem that can make them poor value is part of each monthly payment goes towards life insurance, which is more expensive for older people.

Mr Parker says: 'I have already paid off the mortgage with money from elsewhere. But I fail to understand why this policy has done so much worse than expected.'

An Aviva spokesman says: 'Mr Parker's payment will be boosted to £35,000 once we include our mortgage promise.'

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