Facing the tall order of a mortgage shortfall 
Like thousands of others, Guardian Jobs & Money reporter Phillip Inman has been offered compensation for a mis-sold endowment - but what should he do? Keep the endowment? Cash it in? Pay down the mortgage? Here, he goes in search of answers 
Saturday May 1, 2004
The Guardian 
Standard Life this week said it will pay £4,400 compensation for mis-selling an endowment. That's my endowment, which I took out in 1992 to pay off my mortgage. I hoped the £60,000 mortgage would be paid off by 2017, but the mutual life insurer recently told me the endowment was expected to reach only £52,500, including the boost from the Standard Life "promise". 
There are no strings attached to the compensation. I could throw a big party or buy a motor bike to help me cope with a mid-life crisis. But that would be irresponsible. I've got credit card debts and the endowment's poor performance has left me facing the prospect of a £7,500 shortfall when it matures in 13 years. So maybe I should do something useful with the money. But what? 
It is a question facing thousands of homeowners with endowment policies who have annual statements showing a shortfall. Like me, they may feel they have reason to complain. Even those who don't complain will be considering whether to cash in the policy and switch to a repayment mortgage. 
Only 6% of endowment holders have complained about mis-selling, even though 50%-60% believe they were missold. Standard Life has found that three of my nine grounds for complaint should be upheld. It agreed I was sold an investment when, like many endowment buyers, I really wanted to repay a mortgage. 
I was in my late 20s at the time and working as a reporter on a computing magazine. A financial novice, I listened to a sales pitch that focused on how much cheaper the payments would be and how there might be a bonus, never mentioning there might be a shortfall after 25 years. 
Last year, a statement showed for the first time there was a problem despite the Standard Life "endowment promise", which gave the impression it would protect policyholders from any shortfalls, but in my case offsets little more than half. Set against the compensation is the pitiful surrender value of the policy, which is barely £700 more than the £10,000 I have put into it over the past 11 years. 
Standard Life's decision to demutualise also complicates matters. I could hang on for a possible windfall in 2006. Yet that could be an illusion. The company needs to stuff as much money under the mattress as possible to keep above minimum solvency levels, leaving little left over for windfall payments to policyholders. 
So what are my options? 

Keep the endowment and invest the compensation cash 
If I put the £4,400 compensation payment in a unit trust hoping for an annual return of around 5.5% (after costs) it should generate £8,600 by the time the endowment matures. That would pay off the £7,500 shortfall and leave £1,000 surplus. 
Why say yes: Roddy Kohn of financial adviser Kohn Cougar says keeping the endowment is the best option if Standard Life policyholders can stand the risks. He still rates the company despite its recent humiliation at the hands of the regulator, which said it had failed to put enough money aside to fully cover all its commitments. He says there is still potential for strong growth and a better than expected payout with Standard Life, though not all life insurers will fare so well. Other benefits of keeping the policy include qualifying for a demutualisation windfall and retaining life cover, which is part of every endowment. 
Why say no: The shortfall could widen, leaving me worse off.. Not so far-fetched, given that many insurers face a deteriorating position. Standard Life, like many insurers, has baled out of equities and bought bonds instead. These are less risky, but have a lower rate of growth over the longer term. So 4% growth is all I might see, leaving the investments to make up the difference. But if stock markets slump again, my equity investment could also fail to pay off the shortfall. 
Also, the demutualisation windfall may be worth peanuts. Life insurance could be cheaper bought separately. 
Keep the endowment and cut the mortgage 
A variation on the first solution. You use the compensation cash to cut the mortgage, then convert a further proportion of the interest-only mortgage to repayment. In my case, I could convert £4,000 to repayment. The compensation payment would lower mortgage payments, while the conversion of part of the mortgage to repayment would increase payments. But the two measures would cancel each other out leaving me with the same outgoings (interest payments plus monthly endowment cost). 
Why say yes: The interest-only portion of the mortgage is cut from £60,000 to roughly £51,600, allowing the endowment to come in £7,500 short without causing a problem. "It all depends on how well the endowment will do from now on based on the money paid in," says Patrick Connolly of financial adviser John Scott & Partners. "Each policy is different, but there are many cases where it pays to keep the endowment. It depends on quite a few factors and people need to take advice," he says. 
Why say no: A small compensation payment will have little impact on your mortgage and give you little room for manoeuvre. Switching an interest-only mortgage to repayment can cause quite a big jump in costs if your are midway through a 25-year term. The risk of further losses on the endowment remains. 
Cash in the endowment 
And use the money, along with the compensation payment, to pay down the mortgage. Then convert the remainder to repayment. This move, which also saves on monthly endowment payments, is the most popular solution. 
Why say yes: Put yourself on a smooth path to paying off the mortgage, which might cost a little more each month but has the advantage that the mortgage will definitely be paid off. 
Why say no: In my case, the surrender value amounts to only a fraction of the policy's true value. After 11.5 years I have paid over £10,000 to Standard Life. But it proposes to pay back a measly £10,700. If I use the £10,700 and £4,400 compensation payment to pay down the mortgage and convert to repayment, my monthly payments at 5% will rocket from £250 per month to almost £400 a month says mortgage broker London & Country. Cancelling my endowment contributions saves £74 a month, but still leaves me £76 worse off. Then there is the loss of life insurance on the mortgage sum, which could cost no more than £6 a month to replace but could be much more if you are in your 50s or your health has deteriorated. 
Sell the endowment 
There is a second market for endowment policies which can bid up their surrender value. Firms such as Surrendalink or specialist advisers like Brian Foster of financial adviser Kingswood will give quotes. 
Why say yes: Mr Foster says anyone with policies from Norwich Union, General Accident, Commercial Union, Clerical Medical, CIS, Friends Provident, Prudential, Standard Life, Royal London, Liverpool Victoria Britannic and Pearl may get a little more if they sell rather than surrender. Policies from Guardian, Scottish Mutual, Scottish Widows, Sun Life of Canada, Equity & Law and Colonial Mutual maturing in the next five to seven years could also be attractive to buyers, he says. In my case, I might get £500-£600 extra. 
Why say no: With only a small boost to surrender values, a sale fails to make much difference to the overall equation. The market is flat compared to a few years ago when most policies sold for 20% more than surrender values. If they sell at all, yields are more like 5%-6%. 
Make the policy paid-up 
This means you stop paying the premiums on the endowment. 
Why say yes: You keep the policy until maturity and benefit from any terminal bonuses that may apply. Standard Life members will also be in place for a demutualisation payment. 
Why say no: It leaves an even bigger shortfall. This could be bridged by other investments with the money saved. But you have already taken all the pain with the endowment, and from this point it would probably be a better bet for growth in the future than other savings vehicles. 
What will I do? 
Like most people I was keen to get rid of my endowment and use the money from surrendering the policy, along with the compensation, to convert my mortgage on to a repayment basis. But the surrender value (and sale value) of the endowment is drastically low, and I'll end up paying £76 a month more than I pay at the moment. So I have decided to keep the endowment, pay off enough of the mortgage to keep my payments the same as today, and hope the shortfall doesn't widen over the next 13 years. 

How you can seek compensation 
If you believed your endowment was a sure-fire way to pay off a mortgage you have grounds for claiming it was wrongly sold, writes Phillip Inman. It was never a sure-fire winner and your adviser should have told you as much, whether they were from a bank or building society, an insurance salesperson, or an independent financial adviser. 
Your adviser might also have neglected to discuss how your endowment was going to be invested -- which funds and how risky they would prove to be. Then there is your attitude to risk. Your adviser must establish whether you are someone who is prepared to accept a shortfall if things go wrong. 
Standard Life agreed with me that my attitude to risk was never dealt with by the adviser. 
Like thousands of other people I complained using the endowment action.co.uk website run by the Consumers' Association. It has constructed a pro forma letter that you fill in and print off and send to the firm that employed the adviser who sold you the endowment policy. 
Figures up to September last year show 430,000 people have been awarded £673m following action by the Financial Services Authority and 200m has been handed out to 216,000 other endowment victims following individual complaints. It's only a relatively small number of the 11m policyholders, despite research showing huge numbers failed to understand the risks involved when buying an endowment policy. 
The Consumers' Association says endowment victims should remember they are complaining about the advice they received when they bought an endowment, "not the performance of their policy or the fact they may have a shortfall." 
Asking yourself if the endowment was suitable is a good starting place. If you knew little about investments at the time you purchased the policy, it is safe to say you probably knew little about the risks involved. If you didn't have any dependents, the endowment's life insurance element would have been a costly irrelevance. If you were going to retire sometime during the life of the policy, it was an inappropriate financial straitjacket. 
Once you send off your initial letter, the adviser's firm will want to know more details of your financial standing at the time of sale. If there are gaps in paperwork or memory, don't worry, it is up to the adviser to show they did everything to avoid selling you a pup.