Homeowners face shortfalls amid payout plunge

Payouts on Standard Life endowments, many coming to maturity after the selling spree in the late 1980s and early 1990s, have hit a new low. Picture: Phil Wilkinson

Thousands of homeowners with Standard Life endowments maturing this year face mortgage shortfalls as payouts slump to a new low.

The Edinburgh-based insurance giant delivered mixed news for with-profits investors this week, announcing increased annual bonuses and pension payouts but also lower returns on endowments.

Many savers have cashed in their with-profits investments over the past decade following consistently poor returns, yet it’s estimated that up to 20 million policies remain in force.

Standard Life has 1.1 million with-profits policyholders, including 750,000 with pensions, 318,000 people holding endowments and 50,000 invested in the insurer’s with-profits bonds.

The with-profits model is based on smoothing, where insurers hold back some of the gains in the fruitful years to boost payouts during leaner times. Yet while some investors have benefited from decent returns, huge numbers have cashed in their policies in recent years as poor performance has left them out of pocket.

Standard Life’s underlying with-profits “heritage” fund produced returns averaging 8.6 per cent last year. As it is among the few providers to have a substantial equities weighting in its with-profits fund, many policyholders have benefited from last year’s stock market upturn, said Margaret Flaherty, with-profits communications manager at Standard Life.

“A customer retiring now who has paid £200 a month into their pension over the last 20 years will have seen a return of 12.6 per cent in the last year. A customer whose 25-year £50 a month savings endowment matures today will have seen a return of 7.9 per cent. We have also increased regular (or annual bonuses) for some customers this year.”

Not all policyholders have gained, however, according to Patrick Connolly, certified financial planner, at Chase de Vere.

“This [fund performance] has allowed them to increase some annual bonus rates, which is very positive, and also increase payouts for 20 year pension policies,” he said.

“However, payouts on endowment policies have again been cut and overall returns remain much lower than they were five or six years ago.”

For example, someone with a £200 a month 20-year pension would have received £92,735 on retiring in 2008. Now they would get just £78,699. Similarly, a £50-a-month, 25-year endowment would have paid out £37,763 on maturity in 2008. A £50-a-month policy maturing now would produce a payout of just £27,304, said Connolly.

Those payouts are new lows, delivering a fresh blow to the estimated 100,000 Standard Life endowment policyholders with terms coming to an end in 2013. Some 98 per cent of the firm’s endowment policies reaching maturity this year will produce shortfalls, some into the tens of thousands.

Endowment policies are savings products designed to provide a lump sum at maturity to clear the capital on interest-only mortgages. Sales of the plans reached their peak in the late 1980s and early 1990s. Between 70 and 85 per cent of mortgages sold between 1989 and 1992 were endowment plans, which means huge numbers are now coming to maturity.

But most will fail to produce the returns necessary as the promise of with-profits turns sour.

“With-profits plans were crucified when the companies selling these had to increase their capital reserves due to a regulatory change, moving the bulk of their assets from high-growth equities to low-growth gilts and bonds,” said William Hunter, director of Hunter Wealth Management in  Edinburgh.

“The smart savers used the savings on lower mortgage payments to pay it down to capital and reduce their borrowings.”

While for many people it’s too late, others should think about cashing in their policy, said Hunter.

“There are better tax-efficient savings vehicles such as equity individual savings accounts [Isas], but check first that you don’t have a tax liability on encashment,” he said.

“Your with-profits policy will likely also have life and critical illness insurance included, which you should replace with a term assurance plan (if you’re still fit enough to qualify for the cover).”