Is this the worst-ever shortfall?

Published 07th Mar 2010

THE plight of millions of people who face shortfalls on their endowment mortgages is well known but tens of thousands of savers with pension mortgages face a similar predicament — and the City regulator has failed to take any action.

Pension mortgages were heavily sold in the 1980s and work in the same way as endowments, with the 25% tax-free lump sum being used to repay the home loan.

However, while the Financial Services Authority (FSA) has investigated the mis-selling of endowment mortgages, it has done nothing about other failing investment vehicles used to back up home loans.

One Sunday Times reader has reported an 80% shortfall on his pension mortgage, which is just a few years from maturity.

David Martin, 60, was persuaded by his adviser in 1986 to link a personal pension with Target Life (now part of Abbey Life) to his £25,000 mortgage. His monthly contributions of £68 were forecast to produce a fund worth £125,000, including a tax-free lump sum of more than £30,000, of which £25,000 would be used to repay the mortgage. The rest could be used for retirement income.

Today, four-and-a-half years before maturity, the entire fund is worth less than £20,000 and the tax-free lump sum is projected to be only £5,000, possibly less. Martin is furious that he has paid in more than the fund is worth.

“I was given the distinct impression by my adviser that as long as I paid £68 a month until I retired, the policy would produce £125,000. Fortunately, we sold our house several years ago and closed the mortgage.”

Tom McPhail at Hargreaves Lansdown, the adviser, said: “This is the worst mortgage shortfall I have ever seen. This policy was supposed to deliver two benefits: to pay off the mortgage after 25 years, or to do the same in the event of his earlier death. It would have been very easy to write to Mr Martin and alert him to the impending shortfall but they chose not to.

“This is a toxic product. There is no excuse for continuing to take an investor’s money for a policy that so obviously isn’t going to deliver.”

One issue is that the policy included life insurance of £25,000 to cover the mortgage in case Martin died before it matured. After a serious illness, during which he suspended the policy for three years in the early 1990s, Martin’s life insurance premiums were quadrupled.

However, a letter to him at the time stated that he was not required to increase his payments to reflect that. To be on the safe side, however, he did raise them to £100 a month.

Even if he wanted to transfer his fund to another provider at this stage, Abbey imposes a 25% exit penalty on his already diminished fund, so he is stuck.

Abbey Life, which was sold by Lloyds TSB to Deutsche Bank in 2007, said it was the customer’s responsibility to monitor performance.

“Recent global economic turmoil has affected the value of many funds, including the Target Pension Managed fund, and that has also had an impact on projected values, as well as his unfortunate medical history affecting his life cover premiums,” it said.

“At the time of the plan’s reinstatement, Mr Martin gave his written acceptance of the terms that required a greater proportion of the monthly contributions to be put forward to pay the life cover costs.”

Patrick Connolly at AWD Chase de Vere, the adviser, said: “Target Life policies were recommended by many advisers because they paid high levels of commission.

“The life assurance companies have no incentive to change these policies in line with modern stakeholder pension charges because it is a very good income stream for them and high transfer penalties effectively trap policyholders.”

Abbey could not explain the charging and commission structure for this particular policy last week. Advisers urged others with similar policies to take advice immediately. McPhail said: “Anyone who bought a financial product before the late 1990s should review it because there is every chance that they could be doing better elsewhere.

“Any investor still paying premiums to a life insurance or pension plan from before the late 1990s owes it to themselves to make sure they aren’t throwing good money after bad.”

There is very little information about pension mortgages but it is likely that many are coming up to maturity. It is thought that about 150,000 were sold but because pensions could not be signed over to lenders in the way endowments often were, life companies argue that they were not always aware when a pension was being used to support a home loan.

So far, the FSA has not investigated the sales of these products, but last week indicated that it may do so if more complaints begin to filter through.

Meanwhile, the problems with mortgage endowments rumble on. About 2m are due to mature in the next five years and 99% of them are expected to fall short. Of the 46,000 Standard Life endowments maturing this year, 97% will not make their target. Scottish Widows has warned that nearly 98% of its endowments will suffer a shortfall. Prudential says 75% will fall short — up from an estimate of 25% last year.

Endowment providers are required to send policyholders letters indicating whether they can expect shortfalls.

The letters must be coded green for those still on target, amber for those who may suffer a shortfall and red for those certain to fall short.

Source: ' Sunday Times '

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