Endowment Payouts Fall At The Pru

[interestrateripoff]

http://news.bbc.co.uk/1/hi/business/7908199.stm

The UK's largest insurance company, the Prudential, has become the latest firm to announce large falls in the value of its with-profits investment funds.

The value of with-profits bonds, personal pensions and mortgage endowments dropped last year by between 6% and 10%.

The Prudential blamed the sharp fall in share prices, which saw the FTSE 100 index drop by 30% last year.

But it said policyholders had been shielded from the full impact of this.

The value of the insurer's underlying with-profits fund fell by 20% last year.

However investors were partly protected by the smoothing process of with-profits investments, under which money in the good years is held back to subsidise returns in bad years.

"Although investment markets have performed very poorly in 2008, our policyholders have been protected from the full impact of the market falls and will typically see a reduction of between 6% and 10% in their accumulating with-profits policy values," said David Belsham, chief actuary at the Prudential.

Falling payouts

Other insurers to reveal similar falls recently in their with-profits investments have been the Legal & General, Norwich Union, Standard Life and Friends Provident.

"The returns stand up reasonably well compared to competitors," said Tom McPhail of Hargreaves Lansdown.

"But the underlying fund value fell by more than their competitors due to its more aggressive investment strategy," he added.

Someone who had paid in £50 a month into a Prudential mortgage endowment for the past 25 years will now receive £37,738 when the policy matures this year.

That is 6% less than the same policy's value a year ago of £39,569 - after 24 years of investment - despite savers putting in another year's worth of contributions amounting to an extra £600.

But the effect of falling investment returns is illustrated even more starkly by comparing this year's maturing payout with the one for a 25-year-old policy a year ago.

Then, a maturing mortgage endowment would have returned £44,515.

That was £6,777 more, which means there has been a 15% drop in final maturity payments in the past 12 months.

I wonder how much will have been lost from these policies when we finally reach bottom.

[Freeholder]

http://news.bbc.co.uk/1/hi/business/7908199.stm

I wonder how much will have been lost from these policies when we finally reach bottom.

One of mine that was supposed to produce £36,000 was thought to be going to yield £22,000 on the most recent estimate. Happily I always viewed them as bunce and paid off the mortgages years ago

[deflation]

I don't quite understand the writing of the article. The 'value' of an endowment policy is locked in after every year, the idea being to flatten out ups and downs. A bad year does NOT reduce the 'value' of a policy, just that years bonus and, of course, lowers the estimated final value. I presume that is what they mean.

Even if you get zero years the total amount accrued so far does not go down, unless you want to try and cash it in early, not good.

[mdman]

I don't quite understand the writing of the article. The 'value' of an endowment policy is locked in after every year, the idea being to flatten out ups and downs. A bad year does NOT reduce the 'value' of a policy, just that years bonus and, of course, lowers the estimated final value. I presume that is what they mean.

Even if you get zero years the total amount accrued so far does not go down, unless you want to try and cash it in early, not good.

Not true

The surrender value for mine was around 2.5k less in September 2008 compared to July 2008. And the terminal bonus can range from 0% to >400%. So in 2008, they send you a statement saying it's worth £35k on the basis of a terminal bonus projection of 140%. The markets crash, their actuaries meet and adjust the terminal bonus down to 20%. You would have got more money cashing out earlier, and probably more compared to hanging on to the bitter end (given the current economic crisis)

[eightiesgirly]

I don't quite understand the writing of the article. The 'value' of an endowment policy is locked in after every year, the idea being to flatten out ups and downs. A bad year does NOT reduce the 'value' of a policy, just that years bonus and, of course, lowers the estimated final value. I presume that is what they mean.

Even if you get zero years the total amount accrued so far does not go down, unless you want to try and cash it in early, not good.

Maybe there are different types of endowment, because this is what mine does. I have a guaranteed bonus in some years which once added to the policy become permanent. Also I have no idea what the terminal bonus will be, as it's decided at the end of the term.

[mdman]

Maybe there are different types of endowment, because this is what mine does. I have a guaranteed bonus in some years which once added to the policy become permanent. Also I have no idea what the terminal bonus will be, as it's decided at the end of the term.

You should ask your provider about this. You may find that you are due a terminal bonus, that the terminal bonus potentially makes up a bigger portion of the value at the end of the policy compared to the guaranteed bonuses, and that the terminal bonus is getting horribly eroded by the turmoil in the markets.

With my policy, the surrender value included the terminal bonus (excluding the effect of the future premiums that never got paid due to cashing in early)

[sikejsudjek]

Unfortunately if like us you have a unit linked endowment (not the with profits) its value can fall. A lot !

Its also been time barred from compensation under the farcical FSA rules that state you should have complained when you got a red letter that conveniently didn't mention you could complain. Put another way you were supposed to be psychic. There are around 700,000 claims time barred in this way.

Just as well we don't need it to pay off a mortgage any more. I pity the poor sods who are relying on an endowment.

Edited February 25, 2009 by sikejsudjek

[blankster]

Funny but not much more than an hour ago I posted a reply on another thread asking what the situation was regarding endowment shortfalls as we hadn't heard much about them during this big downturn. I was asking if they were another financial timebomb waiting to push the property market down further.

[eightiesgirly]

You should ask your provider about this. You may find that you are due a terminal bonus, that the terminal bonus potentially makes up a bigger portion of the value at the end of the policy compared to the guaranteed bonuses, and that the terminal bonus is getting horribly eroded by the turmoil in the markets.

With my policy, the surrender value included the terminal bonus (excluding the effect of the future premiums that never got paid due to cashing in early)

Yes we will be due a terminal bonus, they have already told us the terminal bonus makes up a large share of the payout.

The projected payout gives figures for 4,6 and 8% growth, Ah-hem.

It's not for a vast amount of money though, so not that bothered really.

I would be very worried though if I had a mega mortgage I was hoping to pay off with one some time in the future, think I would change to a repayment personally.

Thing is, what happens if you can only afford the payments on an IO? Somewhat stuffed.

[bootfair]

the amount of terminal bonus is entirely at their discretion....

My (now ex) endowment co, slashed their terminal bonuses.

What an utter rip off it all proved to be

Yes we will be due a terminal bonus, they have already told us the terminal bonus makes up a large share of the payout.

The projected payout gives figures for 4,6 and 8% growth, Ah-hem.

It's not for a vast amount of money though, so not that bothered really.

I would be very worried though if I had a mega mortgage I was hoping to pay off with one some time in the future, think I would change to a repayment personally.

Thing is, what happens if you can only afford the payments on an IO? Somewhat stuffed.

[arthurwasright]

the amount of terminal bonus is entirely at their discretion....

My (now ex) endowment co, slashed their terminal bonuses.

What an utter rip off it all proved to be

Yep...and then you die

[eightiesgirly]

the amount of terminal bonus is entirely at their discretion....

My (now ex) endowment co, slashed their terminal bonuses.

What an utter rip off it all proved to be

Yep, thats's what I'm expecting. I would imagine endowments will fade away in time given the awful press they've had recently.

[bootfair]

I was providing info for the person counting on their terminal bonus to boost the payout. Do you have anything either

humourous or vaguely prescient or even vaguely original to add

Yep...and then you die

Edited February 26, 2009 by bootfair

[arthurwasright]

I was providing info for the person counting on their terminal bonus to boost the payout. Do you have anything either

humourous or vaguely prescient or even vaguely original to add

Simply agreeing with your pessimistic view

[interestrateripoff]

Unfortunately if like us you have a unit linked endowment (not the with profits) its value can fall. A lot !

Its also been time barred from compensation under the farcical FSA rules that state you should have complained when you got a red letter that conveniently didn't mention you could complain. Put another way you were supposed to be psychic. There are around 700,000 claims time barred in this way.

Just as well we don't need it to pay off a mortgage any more. I pity the poor sods who are relying on an endowment.

Would the fsa view stand up in court?

[VeryMeanReversion]

Standard Life's 'cash fund' was 90% mortgage backed bonds

It was about half that, I had to look into it for my complaint against them which has now been resolved.

VMR.

[sikejsudjek]

Would the fsa view stand up in court?

Probably not with regard to the time bar. There has been at least one case I know of where the court ruled that the red letter was not a reasonable start time for a time bar unless is was clearly stated that compensation could be claimed. (It was a lower court however and didn't set a president). The FSA know that they are on dodgy ground here, but as usual they are protecting their mates in the city at the expense of the consumer.

The problem is though that you would have to prove mis-selling in court as well as the time bar being unreasonable. Unless you have documentary evidence you were mis-sold ( such as being sold an endowment past retirement age) you would be left trying to prove what was said in a conversation many years ago. The court is under no obligation to apply FSA rules to mis-selling. Chances are that you would struggle to get a judgement as I see it.

[crouch]

My policy with the Pru matured in November 2007 so I was lucky. The policy was prviously with Scot Am which was taken over by the Pru and, to give them their due, I think they managed the situation far better. Having said that I got just shy of £40K payout for a 25 year policy; some of the smaller companies would have paid out more than £100K! I never, ever, received a red letter even with Scot Am.

[deflation]

I have one where the annual bonuses have been poor but some calculation on the back of an envelope shows it has been better than shoving the money under the mattress, just about! Its the life cover that's important.

Endowments were created to provide life cover for your mortgage AND a return. It was the unrealistic predictions that caused problems. The monthly premuims became too low for the expected payouts and unfortunately, it has given rise to the huge amount of IO mortgages out there with no 'repayment vehicle' ( ) attached.

Oh, and I took out mine in early 1988, BEFORE the date at which any compensation can be claimed under unrealistic promise grounds. I would have had to prove mis-selling, which is difficult because the brokers are now gone and I've insufficient evidence. It has been General Accident, CGU, CGNU, NU and now finally Aviva.

[grey shark]

The monthly premuims became too low for the expected payouts and unfortunately, it has given rise to the huge amount of IO mortgages out there with no 'repayment vehicle' ( ) attached.

Endowments , replaced by 90/100% INTEREST ONLY mortgages ....hilarious ...but house prices only go up

Edited February 26, 2009 by grey shark

[Icantbelieveitsnotbutter]

the amount of terminal bonus is entirely at their discretion....

My (now ex) endowment co, slashed their terminal bonuses.

What an utter rip off it all proved to be

Now I'm no apologist for insurers, but I think you fail to understand what you have bought.

In essence you are saving in a capital protected product, where you take 90% of the upside. If you want your money back early you essentially forfeit the capital protection, and the insurer will adjust the surrender value for the actual value of the assets backing the policy. That is your choice. There is no discretion to the terminal bonus, there is a smoothing formula, so in a bad year you get more than the underlying value of assets and in a good year you get a bit less.

The rip off is not so much the product but the high rate of commission to the adviser. I'd not buy one myself, but I personally have little sympathy for someone who has bought a product without making the effort to know what they have bought. If you want to blame someone for the poor returns, then I think the debate is either with your adviser for taking a mountain of commission, or Govt for creating an economy where the stockmarket is now lower than when they came to power, and where it has undermined dividends, profitability and rendered the UK deeply unattractive as a place to invest in the eyes of international investors.

But then I realise we live in a society where taking responsibility for your own decision is out of fashion.

As for unit linked, you have no protection. Your woeful returns will be a function of the high commissions as above, plus the impact of Govt implementing shareholder-unfriendly initiatives, dropping interest rates to very little, penalising saving and taxing private sector success to reward the public sector.

edited for typos

Edited February 26, 2009 by Icantbelieveitsnotbutter

[Icantbelieveitsnotbutter]

most who bought endowments did so because the mortgage rate was discounted or because it was cheaper than repayment. It is convenient to forget that the savings were not saved.