Maturity payouts on with-profits endowments are set to fall by up to 10% this year on 25-year policies on the back of falling investment returns.
According to consulting actuary Nick Taylor, maturity payouts on 25-year endowment policies are set to fall at rates of between 5% and 10% next year, assuming investment returns on with-profits funds of around 5% for 1999.
Investment returns for last year, on which the with-profits payouts for 1999 were calculated, were typically 15%. Taylor added that on 10-year endowments, payouts are typically set to be cut by between 2.5% and 5%.
The news comes as several providers have withdrawn from the endowment market. Pearl withdrew its low-cost endowment last month on the grounds that it would be “irresponsible” to continue offering the policy.
This exit was closely followed by Nationwide, which cited poor sales as the reason behind the decision.
Taylor said that for those looking to pay off a mortgage through an endowment it is possible that, with investment returns falling, the final payout may not be enough to pay off the mortgage.
However, he said: “You cannot have your cake and eat it. With interest rates having fallen in recent years, the cost of servicing a mortgage has come down, but it is probable that investors have been spending the extra money rather than investing. They should be putting this into the endowment so that it can pay off the mortgage.”
Peter Carr, chief actuary at Pearl said: “Low cost endowments are now a high risk product and we believe it would be irresponsible to continue advising our customers to buy them.
“The majority of our customers want a low risk way to pay off their mortgages. Endowments have done that very well for the past 20 years or so. The economic environment has changed and no-one can have confidence that endowments sold now will work as well in the future.”
Nationwide Investment Group (NIG), a subsidiary of the building society, said that as endowments accounted for just 2% of mortgage related sales it was no longer economically viable to offer them.
Bill Tonks, managing director of NIG denied that the withdrawal had anything to do with the recent bad press surrounding this repayment vehicle.
He said: “Our decision does not imply criticism of endowments. But with such a low volume of sales, it is not an effective use of resources to support a training and competence regime for endowments.”
l The Financial Services Authority has concluded that no widespread review of the endowment market is necessary, following the recent press hype concerning a mis-selling scandal.
However, the regulator has warned life offices and IFAs that poor selling practices are unacceptable and that standards must improve markedly.
It also insisted that providers improve communications with endowment holders to help understanding and allay fears.