Mortgage Endowment shortfall - What should i do?

Sirlaughalot

I`m 16 years into a 25 year mortgage endowment policy and for the last few years i have been warned of a possible shortfall by the providers.

Having taken some precautions by investing extra cash each month in cash Isa`s i`m getting increasingly worried about the predicted performance (or lack of it would be more appropriate) of the policy itself. The provider so far after 16 years has failed to beat the very basic building society cash account. They keep giving me figures that suggest there will be a 30% shortfall at maturity of the policy but whats in the pot at the moment is derisory and looks very unlikely to even hit the worst case scenario they keep suggesting.

With 9 years left to run on the policy can anyone explain how these sums by the provider can possible add up?

Do i have any legal standing if they don`t meet their revised shortfalls?

Would cashing in the policy at this time period be a mistake?

Many thanks for your help.

SL

dunstonh

I`m 16 years into a 25 year mortgage endowment policy and for the last few years i have been warned of a possible shortfall by the providers.

Surely a little more than the last few years. Shortfalls started to be in issue in the early 2000s. Over a decade ago.

i`m getting increasingly worried about the predicted performance (or lack of it would be more appropriate) of the policy itself.

Example projections are not predictions.

The provider so far after 16 years has failed to be the very basic building society cash account.

Not unexpected given the way they work. The breakeven point is typically around year 10-12 on a 25 year plan. So, to expect it to have gone ahead by year 16 is pushing it.

With 9 years left to run on the policy can anyone explain how these sums by the provider can possible add up?

Example projections are just that. If you pay in your current amount and get level growth of x% then you will get back £xxx.

Do i have any legal standing if they don`t meet their revised shortfalls?

No. Investment returns are always unknown and the risk warnings state that you could get back more or less.

Would cashing in the policy at this time period be a mistake?

Maybe. Maybe not. It would require an analysis.

To be honest, you are likely to be better off overpaying the mortgage than using a cash ISA.

Sirlaughalot

dunstonh wrote: »

Surely a little more than the last few years. Shortfalls started to be in issue in the early 2000s. Over a decade ago.



Example projections are not predictions.



Not unexpected given the way they work. The breakeven point is typically around year 10-12 on a 25 year plan. So, to expect it to have gone ahead by year 16 is pushing it.



Example projections are just that. If you pay in your current amount and get level growth of x% then you will get back £xxx.


No. Investment returns are always unknown and the risk warnings state that you could get back more or less.



Maybe. Maybe not. It would require an analysis.

To be honest, you are likely to be better off overpaying the mortgage than using a cash ISA.

The only reason i mention the short fall in the last few years is because the provider has changed 4/5 times during the life of the policy and to be honest i can`t remember for the life of me who has sent me what?

Another point there seems to be very little improvement in performance over the last 5 years would that be in line with historic break even analysis?

Thanks anyway

Sirlaughalot

dunstonh wrote: »

Surely a little more than the last few years. Shortfalls started to be in issue in the early 2000s. Over a decade ago.



Example projections are not predictions.



Not unexpected given the way they work. The breakeven point is typically around year 10-12 on a 25 year plan. So, to expect it to have gone ahead by year 16 is pushing it.



Example projections are just that. If you pay in your current amount and get level growth of x% then you will get back £xxx.


No. Investment returns are always unknown and the risk warnings state that you could get back more or less.



Maybe. Maybe not. It would require an analysis.

To be honest, you are likely to be better off overpaying the mortgage than using a cash ISA.

I Have a CAT standard mortgage at the moment and the interest rate seems incredibly low so i thought savings might be a better route than higher mortgage payments my isa was 2.5% last year.

SL

Sirlaughalot

I today received a surrender valuation for my endowment provider thankfully there is not penalties involved.

My mortgage has a current interest rate of 1.5% (variable at 1% above base rate). There are also no penalties for over paying on the mortgage.

With this in mind would it be best to invest the surrendered endorsement value in an easy access savings account/isa at a higher rate or just over pay on the mortgage it the mortgage ends? My Santander 123 current account is paying 3% at the moment.

Many Thanks

SL

Sirlaughalot

Sorry i forget to mention that the endowment provider is Royal London for a abbey National mortgage (Santander).

Looks like the policy is invested into two funds

SM with profit life series 3
Royal London ANL managed

One of these funds is closed which i only found out about yesterday.

What does the term closed mean?
With the one fund being closed does that effect possible returns on the whole policy?

Many thanks

SL

Sirlaughalot

I know this might be a long shot but is there a way i can check the historic performance of the 2 funds my endowment is invested in and if so can i compare their performance against similar funds?

Is there a comparison site for individual funds?

Might be useful in my decision to surrender or not!

Many Thanks

SL

Sirlaughalot

Ok i have managed to to locate a price/info for this fund using http://funds.ft.com/. (thanks to a google search)

Within the info there is a three(from 5) star rating from a company called Morningstar. I assume this means a middle of the road average performance compared to it`s peers.
This may be of help to other members with similar questions to my own.

Regards

SL

TrickyDicky101

Sirlaughalot wrote: »

One of these funds is closed which i only found out about yesterday.

What does the term closed mean?
With the one fund being closed does that effect possible returns on the whole policy?

The fund being closed means it is not open to new business (so the only premiums or new money into the fund come from existing policies). Ultimately, the fund will dwindle to zero as policies mature with no new replacements and claims are paid out.

There is a school of thought that closed funds mean that the life insurance company has little incentive to maximise returns as they are not trying to attract new business. For this reason, closed funds often get referred to as 'zombie funds'.

A key indicator of the inherent riskiness of a fund is to look at its Equity Backing Ratio (EBR) which you should find displayed in the fund's PPFM (Principles and Practices of Financial Management). Regulatory pressure to avoid serious slumps in fund value has meant that the proportion of the With Profits fund invested into equities across most UK insurers has fallen (sometimes quite dramatically) over the last 10 to 15 years (and replaced with 'safer' bond and cash type investments. Less equity means less risk but also less potential reward (so lower final value that what was likely estimated at the start of the policy - ie shortfalls).

Sirlaughalot

TrickyDicky101 wrote: »

The fund being closed means it is not open to new business (so the only premiums or new money into the fund come from existing policies). Ultimately, the fund will dwindle to zero as policies mature with no new replacements and claims are paid out.

There is a school of thought that closed funds mean that the life insurance company has little incentive to maximise returns as they are not trying to attract new business. For this reason, closed funds often get referred to as 'zombie funds'.

A key indicator of the inherent riskiness of a fund is to look at its Equity Backing Ratio (EBR) which you should find displayed in the fund's PPFM (Principles and Practices of Financial Management). Regulatory pressure to avoid serious slumps in fund value has meant that the proportion of the With Profits fund invested into equities across most UK insurers has fallen (sometimes quite dramatically) over the last 10 to 15 years (and replaced with 'safer' bond and cash type investments. Less equity means less risk but also less potential reward (so lower final value that what was likely estimated at the start of the policy - ie shortfalls).

Thanks TD,

That could have a big impact on my decision to surrender or not! These zombie funds as you call them could look very unattractive to surrender the policy to third policies i assume.

Is there any legal requirement to disclose the fact that the fund is closed to new business?

Thanks for your help

SL

TrickyDicky101

Sirlaughalot wrote: »

Is there any legal requirement to disclose the fact that the fund is closed to new business?

I'm not aware of any. There are a lot of closed funds about - and there may well be many more in the future as the Life Insurance industry has moved towards Unitised Funds where the value of the policy is directly correlated to the value of the underlying investments (so there is no 'smoothing' of annual bonuses in operation).

Personally (and this is only my opinion) I would not invest in a policy that relied on smoothing of returns. I prefer to diversify my risk myself rather than let some actuary do it for me.