Scottish Widows' endowments might not pay off mortgages
Scottish Widows has warned that 88% of its mortgage endowment with-profit policies might be in shortfall when they mature.
The life office has also revealed that this year's mortgage endowment payouts for 15 and 20-year policies were under target. An endowment customer with a 15-year policy maturing on 1 February 2008 would have expected to receive a payout of £14,923, but in fact received £12,714. Likewise, the projected payout for a 20-year policy was £24,400 but the actual value on maturity was £22,558.
However, 25-year policies were £4,825 above target and have paid out £38,136.
Endowment mortgage with-profit funds were popular in the 1980s and 1990s, but shortfalls meant that many policyholders were left unable to repay their loans. They work by investing the mortgage repayments in order to produce a lump sum large enough to repay the debt.
Scottish Widows says it has placed 88% of its policies on red alert, which means that these may be in shortfall when they mature. This follows Norwich Union's recent admission that 90% of its mortgage endowment with-profit funds might be in shortfall.
Scottish Widows’ has also confirmed that its with-profit fund made returns of just 5% last year, down from 10% in 2006.
It says that the £17 billion fund performed well during a year of “volatile investment markets” despite diminished returns.
Scottish Widows increased the with-profit fund’s exposure to UK equities to 44% during 2007, up from 43% in 2006, while simultaneously lowering investment in fixed interest from 31% to 29%. It also increased investment in property from 10% in 2006 to 12% and reduced exposure to other investments from 8% to 5%.
Regular bonuses across conventional and unitised policies remained unchanged from those set in 2007, but Scottish Widows has added regular bonuses to 441,000 unitised with-profit polices and 239,000 conventional. Final bonuses increased slightly from those seen last July.
With-profits funds are administered by life assurance companies and access to them is through the life company’s products such as bonds, endowments and pensions. Your monthly contributions are pooled with other investors’ money and invested in a mixture of shares, bonds, property and cash. Each year, a “reversionary” bonus (a declared percentage) is added to your investment and a large part of the policy’s final value depends on these bonuses during the investment period. In years when the with-profits fund performs well, some of the return is held back and paid out in years when the fund does badly and this “smoothing” process makes with-profits investments unique. When the policy matures, the life company may pay a discretionary “terminal bonus”.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).