Endowments set to slide

Mortgage endowment sales are set to plunge by half from £600m a year to £300m after the industry's professional body, the Institute of Actuaries, yesterday sounded the death knell on shorter term endowments and said that new 25-year policies would fail to meet the needs of many home buyers. Endowments are the life insurance policies traditionally sold to provide a lump sum to repay house-purchase borrowings.

The institute admitted that the 500,000-plus home owners who will be asked to pump in extra money into their failing endowment policies over the next few months should not top up their policies because charges are too high.

It suggested instead that people either paid a lump sum into their mortgages or put aside money into a savings account to meet potential shortfalls.

Last year life offices sold 637,000 new endowment policies worth £583m in annual premiums. But the true cost to life offices from the expected collapse in sales will be far greater than £300m, as endowments give the companies a steady income stream worth at least ten times the annual premium. The loss of business is therefore likely to cost the insurers around £3bn.

The institute's report comes amid growing concern about endowments, and confirm the view of trade and industry secretary Stephen Byers view that endowments are only suitable for home buyers in exceptional circumstances. Yesterday, the financial services authority chairman, Howard Davies, faced questioning from MPs on the treasury select committee, which is investigating sales of endowments.

He said that the FSA was inspecting sales practices at major endowment sellers and when the results are compiled in December it will take a decision about initiating a broader investigation along the lines of the £11bn pensions misselling review.

The FSA has stepped back from implementing one of the institute of actuaries' key recommendations. The institute says no life office or adviser should sell endowments on projections projecting returns above 6%, yet the FSA says it has no plans to reduce its projection bands, which allow for forecasts up to 8%.