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Endowment Pay-outs Will Continue To Fall

Endowment policies have lost almost all credibility and financial advisers have lost confidence in them as investments. With-profits policies are now forecast to give worsening returns for the next fifteen years. Some policies are projected to pay out only a quarter of what was originally predicted for them. The investments are bad enough and they are being made worse by charges which take about a third of the profit each year.

The Actuarial Profession has made some calculations on how much a 25-year with-profits endowment policy might pay out in the future. On a £50-a-month plan, by 2014 the policies might pay less than £30,000, and by 2020 the result will be around £25,000. Yet when the policies were taken out the top companies were paying out over £100,000 on such policies. The investments are struggling because most funds withdrew from shares when the stock market was struggling and now it is too late to re-invest. Therefore good long term returns are impossible to revive.

The situation is going to create a further exposure for millions of Britain’s beleaguered homeowners. Those sold with-profits endowments in the late ‘80s and early ‘90s could be faced with significant mortgage shortfalls when it comes time to repay their loan.

Insurance companies have been saying for a while that their policies will come up short. One of the biggest, Norwich Union, says only one in ten of its policies will achieve its target.

Although the stock market has shown excellent gains in the past three or four years, with-profits policies have failed to taker advantage as they have held to low a level in shares and property, which has also boomed. Now it is too late to invest in these markets, both of which may well be reaching their peak very soon.

Financial advisers love endowment policies when they were selling them twenty years ago. They reaped huge rewards in terms of commission at the time, but even they have no faith in the policies any more. A recent survey showed that over 60% of IFAs now have a negative view of with-profits, and just 1% of IFAs remain very positive about them. However, it does not appear that IFAs are making much attempt to help their investors get rid of the failing policies.

Industry watchdog the Financial Services Authority is worried that advisers are failing to give advice on policies because they are complex and they fear being accused of mis-selling the policy in the first place.

The Actuarial Profession has found out how much the insurance industry was boosting pay-outs in the nineties to make new sales of the policies. In that period they were paying out up to 24% more to investors than they were due. Those problems had gone by 2004, but of course pay-out levels dropped as a result.

There is also a question about charges. Calculations show that 25 policies due to mature in 2007 should have given a decent 10.4% annual growth. Thus a £50-a-month investment would have paid out £71,000. In actuality the pay-out average was a mere £39,667 – an annual growth of only 7%.

Endowments were sold by salesmen who were paid a lump sum up front – out of the policy investment – and who failed to give follow-up advice. A third of annual growth has been lost. It makes a big difference to the bottom line.


Tom Smith
17th July 2007

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