endowment question

apolotares

in 1992 i bought my first house with a friend, to renovate and sell. Which we did just 4 years after we bought it. And a nice profit we made to. Now i wont complain it was mis sold. It was a freinds idea to have an endowment, i recall commenting at the time that working in the city i thought it was a stupid idea to rely on some bloke in red braces to pay off my mortgage. And how right I was it seems. But after i disposed of that mortgage, i figured what the hell the amount i paid into it for the target return of 33 grand id only waste in the pub if i stopped it so i kept it going. And so i have, and even though it will shortfall and i suppose I could of invested the money more productively, I made other investments all the same and thought of it as money id find down the back of the sofa in 2017 when it matures. however i do have some questions. I have the certificate but have long since lost the guide notes. The premiums started off at 47.48 a month, but regularly over the years ive got letters asking me if i would like to use the indexation option, and i have, I now pay 84.79, ive not received another of these letters since 2008. Now obviously i have not really bothered all that much about this. But iam curious, what does this indexation option i have utilised mean exactly. I thought it meant that it adjusted the payout with inflation. but the target value or the payout if i die has remained the same. Can anyone explain what its for ? is it just to make up the shortfall in its performance, if so why is it still predicting a shortfall of 6 grand. I also think if i complained about the shortfall, id have a weak case seeing as ive not ever used against a mortgage, and with 6 years to go it may even do ok yet i suppose, although i doubt it.

dunstonh

i recall commenting at the time that working in the city i thought it was a stupid idea to rely on some bloke in red braces to pay off my mortgage. And how right I was it seems.

The bloke in red braces actually has little to do with the endowment failing. Indeed, chances are had the bloke in red braces had a greater input then there would have been less of a problem.

But iam curious, what does this indexation option i have utilised mean exactly.

It means you have paid more into the investment element.

but the target value or the payout if i die has remained the same.

as it should do as you dont need extra life assurance costs to be worried about.

is it just to make up the shortfall in its performance

Yes. Indeed, had more endowments done that from the start then it would not have resulted in the issues. As mortgage rates came down, endowment premiums should have gone up to reflect lower returns. Instead, most people pocketed the money.

if so why is it still predicting a shortfall of 6 grand.

You dont get predications. You get projections make a range of assumptions. Those assumptions have changed over the years typically lowering the assumed growth rate. e.g. your endowment may have a target growth rate of 7% p.a. but the projections used may be 6% as mid rate and may have dropped more recently to 4% (or whatever). That doesnt mean the investment returns are. Its just the projection rates for examples.

I also think if i complained about the shortfall, id have a weak case seeing as ive not ever used against a mortgage, and with 6 years to go it may even do ok yet i suppose, although i doubt it.

Its an easy rejection as a) you knew about the risk and b) the complaint looks at the period it was used to cover the mortgage. That occurred long before endowments went into shortfall positions and 3) over 3/4 of endowments are now barred from complaint (you have 3 years from first being notified of a high risk of a shortfall as one timebar - there are a couple of others as well which have also gone in your case).

apolotares

thanks for that, so just to make sure i get this. The premiums i invested, the interest earned on that investment dropped, therefore i paid more money in to make up for that loss off return. This was a good thing and is why my letters have ussually stated on track or ''amber''. By the way not against red braces in principle, im a ship broker. Oil business actually. Although red braces never really caught on on the Baltic Exchange. Thank god. Like i say im not unhappy, i have easily been able to afford the premiums and even if it only pays out 25k, my liver appreciated it and my wallet will to. Ive done ok investing so one bad one and not that large is not the end of the world. your a star thanks the explanation.

dunstonh

The premiums i invested, the interest earned on that investment dropped

You dont earn interest on investments (ignoring fixed interest sector investments as interest is different to savings account). Investments zig zag in value in the short term with the aim of higher growth over the long term. The 2000s have been one of the worst decades for investing in conventional markets in history. It also followed a decade of good growth that saw very few market corrections and no major stockmarket crash in the western markets.

This meant that the unit prices went up too fast in the 90s (with no significant drops allowing investments to be bought much cheaper) and down too fast (and twice) in the 2000s (meaning those investments bought in the 90s ended up for a period being worth less than they were paid for. A double whammy. Ironically, those who started endowments (or any tax wrapper with regular payments) in the late 2000s could actually do very well in future as for much of the 2000s they have bought investments far cheaper than they are currently worth (even though in the short term they would have looked poor at some points).

As the investments were not making as much as they wanted they asked you to pay more to make up for it.

Just today I had an endowment projection arrive in my office for a standard life endowment. That has been in a shortfall position for about 3 years but todays one puts only the low rate projection in shortfall with the other two showing surplus. These zig zags happen in the short term and you could well find yours shows back as on track or surplus again in the near future. Especially if it was showing that just before the recession.

apolotares

ok seems i got the gist of it though, thanks the latter explanation, i understand even more now. If it performs better than i expect, and my expectations after all the press are not high. Then that will be a nice surprise.

Thanks again the explanation, seems maybe keeping it going wasnt such an awful idea after all.

thanks again.