What to do about your endowment?

Money Talk
By Colin Jackson
Baronworth investment services

Advertisement

BBC Working Lunch - solving the UK's endowment headache

In the 1980s many people who took out a mortgage linked it to an endowment policy - as a long term investment policy.

This was very often sold to them on the basis that when the time came, sufficient money would have been earned to repay their mortgage.

Not only that, but there would be surplus money to celebrate with.

For some time the endowment policies performed extremely well, particularly in the early days when investors received tax relief on their premiums.

But over a period of time tax relief was abolished, and investment returns deteriorated, leaving many people with an actual or prospective shortfall.

If you are one of those unfortunate people who has received a letter from your life assurance company warning you of a shortfall, what should you do next?

Options

One step is to investigate whether the policy was mis-sold in the first place.

Just because your endowment policy has under-performed it does not necessarily mean that it was mis-sold in the first place

If you are sure you were misled about the prospects for the policy when you first took it out, then you can make a claim against the organisation that sold it to you.

This might be a financial adviser or a life company itself.

Any complaints should be put in writing and the organisation against whom you are complaining is obliged to respond within eight weeks.

If you are dissatisfied with their response then it is open to you to refer the matter to the Financial Ombudsman Service (FOS) who will investigate your claim of mis-selling.

If they find in your favour then they will make a suitable award.

However, you must bear in mind that just because your endowment policy has underperformed, it does not necessarily mean that it was mis-sold in the first place.

Ambulance chasers

It costs you nothing to refer the matter to the FOS.

Colin Jackson

There are various companies who offer to help you recover compensation if you feel that you have been mis-sold an endowment.

They are called claims management companies and in the industry we refer to them as "ambulance chasers".

Most people do not need their help as the form that has to be completed is straightforward.

Unless you feel totally unable to complete the form, there is absolutely no reason why you should share any compensation with one of these companies.

Bear in mind there are time limits for making a complaint.

The clock starts to run from receipt of red letters from the life company warning you of a potential shortfall.

But it seems as though different firms adopt different time limits so this would have to be checked for each policy.

Any complaint to the FOS has to be referred within six months of the date on the final response letter.

There are other time limits, so for further information you should contact the FOS directly.

Shortfall

If you have a policy that has under-performed and you no longer with to keep paying the premiums then you could, if you so wish, surrender it back to the life company.

If... your endowment falls short when it matures then the mortgage will still have to be paid

That means asking them to pay you the value it has accumulated so far, rather than wait to the end of its life.

However, before doing this you should also explore the possibility of selling the policy.

There are a number of companies that advertise buying endowment policies.

One way of dealing with them is to approach a trawling service which will approach a number of these "market makers" to see if it is saleable.

If it is, you will be told the best price and you can then decide whether to keep it, surrender it or sell it.

If you decide to sell it there should be no deductions and the amount that you are quoted should be the amount that you should receive.

Another alternative is to make the policy "paid up".

This means that you would pay no further premiums to the life company.

The policy may or may not increase in value but at this point you would know approximately the amount of your shortfall.

You could then approach your lender and ask to convert the balance of the mortgage to repayment.

Repaying the mortgage

If, at the end of the day, your endowment falls short when it matures then the mortgage will still have to be paid.

As mentioned above, one option is to approach the lender to convert the shortfall to a repayment mortgage.

This could prove to be quite expensive in terms of higher monthly repayments.

So you could enquire whether they would agree to extend the term of the mortgage to enable you to repay what is outstanding.

They will need to be satisfied that you still have the ability to pay.

If the lender will not co-operate then you will have to investigate borrowing elsewhere, making sure that the terms of any loan are acceptable to you.

If none of this is possible, and you cannot raise the money by any other means, then you may be forced to sell the property and down-size.

Alternatively you could consider an equity release scheme which would be subject to a number of factors, including the age of the youngest person that will occupy the property.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.