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Understand Endowments.

Endowment savings plans are long term policies often sold by insurance companies with a view to paying-off the mortgage capital at the end of the term.
Recently they have underperformed, mainly due to the recent underperformance of stock markets, and are widely regarded as being things to be well avoided, particularly as so many policies were mis-sold as inappropriate mortgage options.

Endowment Basics

Endowments are investment schemes that include life assurance. You pay a monthly premium to an insurer and the policy is intended to grow to a value sufficient to repay your home loan and, possibly, produce a surplus lump sum as well.

Only a small number of endowments guarantee to repay the mortgage they are linked to. Since the Financial Services Act was put in place more than a decade ago, sales people have been prohibited from basing their forecasts about investment returns on past performance. Nevertheless, many homeowners over the years were left with the optimistic impression that their policies would produce more money than they needed to repay their loans. Sadly, this could not be further from the truth. Millions of people have now received colour-coded warning letters from their endowment providers. "Red" or "amber" letters meant a high or significant risk that the endowment would not grow enough to cover their mortgages, leaving consumers to foot the bill.

Recent reports estimated the total cost to consumers would fall between £30bn and £50bn. At the most conservative end of the scale, a total cost of £30bn would mean an average shortfall of £5,500 for each of the 5.3 million endowment policies.

Prudential's With-Profit Increase

(Tuesday 22nd February 2005 news story)

Shock of the year so far: An insurance company has vowed to maintain or wait-for-it ...increase bonus payments on with-profits policies this year.

Prudential, who run Britain's biggest with-profits fund, said that the fund had increased in value by 13.4% over the last year and is now worth £73bn. Over five million policyholders will be glad to hear the news, having as they do, savings, pensions and endowment investments in the fund, which, like all with-profits investments get topped-up with bonuses, rather than interest, each year.

This news is refreshing to ears used to the same depressing chorus of "with-profits bonuses cut once more" from life companies every few months, in turn. Whilst Prudential are perennial overachievers in terms of investment performance, we are crossing fingers for the other companies when it's their turn to report on with-profits forecasts.

Come on guys, lets have a with-profit fund that comes with a profit, for policyholders. And make it quick - it's so hard to type with crossed fingers.

Abbey victims could get £3,500

(Saturday 7th December 2002 news story)

Abbey Life has been fined a record £1m for mis-selling endowment mortgages. Up to 50,000 homeowners who were mis-sold mortgages by the company will now receive compensation of between £1,500 and £3,500 each.

Abbey Life said compensation would be based on "putting the customer back in the position they would have been in if they had taken out a repayment mortgage". Customers should receive letters in the next couple of days telling them if they are due compensation but will not be told the amount they are to receive until later. The company, a subsidiary of Lloyds TSB, said it was "very sorry that the situation arose". The fine was imposed by the City watchdog the Financial Services Authority who said that it would have been even higher if Abbey Life had not taken extensive remedial action. Today's fine is only the second imposed for endowment mis-selling but more are on the way. The FSA reckons 23 insurance companies face a bill of several hundred million pounds.

So far 42,000 policyholders have shared a total of £139m in compensation. Endowment mortgages have been ravaged by the collapse in stock market values in recent years. An estimated one million homeowners with endowment mortgages have received the "red traffic light letter" that warns them their insurance policies are not growing fast enough to secure an adequate return and ensure the repayment of their mortgages. Carol Sergeant of the FSA acknowledged that Abbey Life had worked hard to make sure customers received "appropriate redress". But she added: "The failings in this case are serious." Weaknesses in Abbey Life's internal controls had exposed large numbers of consumers to the risk of loss, she said. Abbey Life was closed to new business in April 2000. The fines cover a period from 1995 to 1999 but compensation payments are likely to extend back to mis-selling since 1988.

Sergeant added: "Abbey Life has voluntarily agreed to extend its review of mortgage endowment sales back to 1988, at considerable cost to itself and has also undertaken a wide-ranging review of other products. Abbey Life has, in doing so, demonstrated a high regard for the priority of the interests of its customers. Senior management has accepted its responsibilities to customers and the review now being undertaken should ensure they receive appropriate redress. Without this approach by Abbey Life, the penalty imposed would have been significantly greater."

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