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Pain of low-cost endowments

The continuous wave of low-cost endowment review letters is causing many clients to consider their own situation.

It is not difficult to find out through various media how easy it is to claim compensation to cover the potential loss from a mortgage taken out some time ago. A friend or colleague may even have personal experience or perhaps know someone who has “stuck their sticky fingers in the cookie jar”.

Certain companies&#39 projections (Prudential and Standard Life are certainly two) are based on the current surrender value of the policy – plus future premiums and growth. Either market value adjustments or penalties reduce this value.

Consequently, the projected maturity figure, which would not have an MVA, is based on a figure that does have an MVA. This projection is not fairly representative of the true value. In this instance, decisions as to whether to surrender or not and or claim compensation are based on a false premise.

According to Standard Life, the need to use the current surrender value and not the true value is laid down by the FSA. So is the fact that the provider cannot tell the client details about the value that is being used.

There is obviously scope here for wealthy individuals (perhaps those in the public sector with non-contributory, index-linked pensions) to buy secondhand polices that have been artificially devalued. Lorna Bourke has already promoted these as a good investment. The Consumers&#39 Association advocated the original policies as a “best buy” in 1988. It would appear that the only people that should not be allowed to benefit from low-cost endowments are the policyholders.

Since receiving reviews, many sensible people have had cause to look again at their mortgage arrangements. Plans to repay mortgages are set up for a long time, in many cases for 25 years. It is inconceivable that the economic climate will remain constant for so many years. Consequently, it is necessary to review plans with changing circumstances.

The current climate of low inflation, low interest rates and low returns on investments has affected with-profits mortgage endowments in two ways.

The bonuses or profits have been greatly reduced but interest rates have also fallen considerably. Savings on interest payments are greater for endowment mortgage holders as the overall interest charges are higher.

It is now possible to take advantage of new lower interest rate mortgage products to re-schedule mortgages, repay some of the capital and reduce any genuine potential shortfall, with little or no increase in monthly outgoings.

Surely this is the way forward rather than time-consuming and unfair claims that things have been done incorrectly simply because the economic climate has changed.

Charles Mayson



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