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During the 1970s and 1980s it became very popular for people to use endowments policies to pay off their mortgage.
It needs to be stated that for many years these with profits policies were exceptionally successful in reaching their targets. Many people who used endowments found that they produced the desired result and in many cases they not only paid off the mortgage but also produced a surplus (tax free) which created a nice windfall for the individual.
This is because endowments would often produce returns after charges of around 12-15% per year over many years, sometimes over 20/25 years.
The problem is that endowments taken out later, after the 80s, suddenly started to struggle. They no longer produced the high returns and this meant that many people, who thought they were getting a plan which would pay off their mortgage and produce a surplus, found that they were in deficit. Not only was (or is) a surplus a long forgotten benefit, many endowment holders find that they are not even going to get their mortgage repaid. Depressingly, in many examples, these shortfalls are going to be VERY significant.
We wish to stress that not all endowments with profits are used for paying off mortgages, far from it, many are simply savings plans that individuals took out to build up profitable savings for their futures.
Whatever the purpose of the with profits endowment it is highly likely that it is not producing the goods, but with an element of life assurance built in and many plans constructed over long terms it come sometimes be difficult to know how bad (or good) they are.
For example, if you have paid, and continue to pay, £150 per month into a 25-year with profits endowment and you are 6 years through the term, how can you possibly know if £6,000 is a good, fair or bad current value? How can you know whether this is worth persevering with? In this example, if you simply keep paying for the next 19 years, you are committing a further £30,000 PLUS of your future prosperity to this particular plan.
Please be aware that the FSA have done a lot of work in this area and have designed a traffic light system so that if you have a plan, once a year, you will get a letter with either a green, amber, or red symbol warning you of the future projected payout.
Most letters of this sort are red! Which must tell its own story; as such plans are predicting problems in the way of serious shortfalls on their original aims and predictions of future payout.
Whatever “colour” your letter don’t rest on this, it is only an indicator, getting an individualised audit is the best way of deciding what the position is and what you should do.
With a very large market for second endowments and also with profits policy loans available from many companies, the options for an individual “stuck” with an endowment are considerable.
The key is to cut losses and not get collared with paying into a loss-making plan for a long period simply because this is what you originally decided to do.
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