Endowment Misselling?

Uncle_Cuddles

We have just got a "sigificant shortfall" letter from our mortgage endowment, telling us we could run out of time if I have a complaint. Obviously, I am peed off with the shortfall (£8300 on £36000 after only seven years) which increases every letter we get, but I am not sure we have any grounds which is why I have not done anything about it.

I am not stupid - I knew when I took out the mortgage that an endowment was largely based on the performance of the stock market. The simple fact is we were naeve, young and skint when we took out the mortgage. We were first time buyers (single income with a baby and one on the way) and when asked what sort of mortgage we wanted, we asked for the cheapest so we were sold the endowment. When I asked about the scare stories in the press I was told that these were the exception, and the press don't report on the vast majority making lots of money out of over-performing endowments over the years. He asked if we wanted a risky endowment which would give us the best returns and the chance to pay it off early, a safe one which would just steadily achieve the required growth needed to pay of the morgage in 25 years (but was guaranteed to pay it off in full), or a middle ground one which is a mix of the two. We chose the middle one. The projections used were based on 6%/7.5%/9%, with the FA remarking that 9% should be easily achievable. When I remarked on the couple of thousand shortfall on the 6% projection he remarked what will a couple of thousand be in 25 years - less than a weeks salary?

I think what pees me off the most, that the of the projections now used there would still be a shortfall even if it grows by 8% p.a. Of course it may turn itself around...!

Anyway, we have moved mortgages since and we have took on a part repayment mortgage and have covered the shortfall with extra on the repayments.

Do we have any grounds for misselling?

dunstonh

no you dont im afraid. You were aware of the risk.

There are some points to consider here.

When you took your endowment out, it would have been projected to grow at x amount per year. These are the things you have to remember:

1 - The charges are front loaded so it would be unlikely to achieve that growth in the first few years. However, the charges in later years are not going to have much, if any impact on the growth.

2 - The FSA lowered the growth rates to be used on the projections. These are projections not forecasts. Your endowment was probably set up using the middle rate of 7.5%. Any projection that uses the lower rate of 6% is certainly going to show a shortfall. It doesnt mean the endowment is going to perform any differently.

3 - If its a with profits plan, they are not allowed to include any potential terminal/final bonus in the projection.

4 - some endowment companies are believed to be projecting from surrender values rather than current values because they have no other way to do it. This often means any guaranteed sum assured is left out of the projection. This is noticeable when red/amber letters have been issued to policyholders in their final year. Yet when these have matured, they have given surplus payments. How can someone in their final year get a red letter shortfall but get a surplus amount less than 12 months later?

5 - unit linked plans have the better potential to perform at a higher rate of return over the coming years. Although you may want to look at the funds you are invested in. A spread of index linked, property and equities could still give the potential for surplus over the longer term. Especially following the biggest stockmarket drop in recent times. Anything you buy now is cheap cheap cheap.

Endowments may be out of date nowadays but its still possible to have a good one (low target growth rate or decent fund spread).

Uncle_Cuddles

Thanks DD. I didn't think so. Fingers crossed for the future!!

dunstonh

If it is unit linked, you should ask the provider for a list of available funds. I would bet you are in the managed fund. You may well be better off in a couple of the others they have available. Bog standard managed funds tend to offer lower potential returns than many of the specific purpose funds.

Looking at past performance (which carries the usual warnings), over the last 10 years, the balanced managed sector has grown by 43.8% before charges. This isnt very encouraging when you have a target growth rate of 7.5%pa. Gilts have grown by 74.9%. Commerical property 94.64%.

By having a spread of investment areas in those three things, for example, you have safer areas with lower potential for growth but lower potential for volatility. Both Gilts and Comm property would have your endowments on target (over target actually) had you been in them from the start (hindsight is great isnt it). However, the projections you receive would still show a shortfall at 6% though!

sonia1963

Riding on Uncle Cuddles' coattails (sorry), I have a question:

11 years ago *I* took out a unit-linked endowment mortgage so my mother and her husband could buy their home. At the time the saleswoman said it would generate enough funds to clear the mortgage with a cash benefit at the end of it's 25 year life. At no time did she say this might not happen otherwise we would have investigated other options.

The parents sold the house in January of this year so the endowment isn't needed. Any suggestions as to what I could do with it?

Do I have grounds for complaint at this (possibly late) stage? The endowment is with the Woolwich and I'm hunting to find the most recent paperwork on this matter as the parents have now flown off into the sunset ::) with a fat cheque ;D

dunstonh

Riding on Uncle Cuddles' coattails (sorry), I have a question:

11 years ago  *I* took out a unit-linked endowment mortgage so my mother and her husband could buy their home. At the time the saleswoman said it would generate enough funds to clear the mortgage with a cash benefit at the end of it's 25 year life. At no time did she say this might not happen otherwise we would have investigated other options.

The parents sold the house in January of this year so the endowment isn't needed. Any suggestions as to what I could do with it?

Do I have grounds for complaint at this (possibly late) stage? The endowment is with the Woolwich and I'm hunting to find the most recent paperwork on this matter as the parents have now flown off into the sunset  ::) with a fat cheque  ;D

Potentially, yes you do have grounds for complaint if you were not aware of the risk and it wasnt documented.

sonia1963

DD, I'm pretty sure that at no time were we made aware of the potential risk. In fact, if I remember rightly the woman was so particularly eager to steer me in the direction of the endowment, that I felt she didn't investigate my financial circumstances too deeply.

I'll contact The Woolwich and see what they say. Hopefully I'll remember to report back with my findings.

Cheers DD