Hang on to your cash

As begging letters go, there is a certain insolent charm about the missives thousands of homeowners will be receiving from their life insurance companies over the next few months. The news is bad: endowment policies are "underperforming", in the industry's jargon, and as a result many households will not have enough money to repay their mortgages. In other words, the people who sold you your mortgage were telling porkies.

And the solution? We should give them more money to cover the shortfall caused by their unrealistically greedy projections. Of course, what they don't mention is that anyone choosing to increase their endowment to cover the shortfall will pay another set of commission charges on the extra payments - in some cases as high as 10% of every premium paid. High commission charges are one reason why endowments are such bad value compared to traditional repayment mortgages.

The government is always talking about rip-off Britain, but this is truly the scam of the century. Millions of households had endowment policies pushed on them by commission-hungry salesman during the 80s and 90s, at a time when it seemed that the stockmarket would deliver double-digit returns, year after year. Based on these hopeful projections, endowments appeared to be a sure bet, a much cheaper way of paying for a house than through a repayment mortgage.

For some, who took out their endowment policies before the government removed the tax breaks and whose providers gave them a realistic picture of returns, the policies have proved an effective investment mechanism.

But as inflation has dropped through the floor since the mid-90s, the expectation that company profits - which ultimately underpin share values - can continue to rise at their historical rate has looked more and more flimsy, fatally undermining the projections underlying at least 500,000 endowment policies. The Personal Investment Authority (PIA) has ordered the companies to make more realistic projections about the future returns endowment holders can expect. Hence the letters.

The endowment mortgage swindle is just the latest scandal to hit the personal finance industry, once held up as one of the UK's success stories. Two of our biggest financial decisions - buying a home and saving for a pension - both now rely not just on the vagaries of the stock market, but on the dubious probity of the salesmen.

When the government deregulated the finance industry in the late 80s, the idea was that private welfare provision would increasingly replace the strained resources of the public social security system. The Conservatives dreamed of a nation of homeowners, saving for old age, sickness and unemployment through a variety of investment schemes.

Instead, the financial quackdoctors rode into town. First they told us personal pensions were a better deal than occupational pension plans. Then they persuaded a generation of homeowners that the market could only ever rise and that endowments were the only way to pay off a mortgage.

The life insurance industry still hasn't got the message: many in the industry are privately saying that the PIA advice is nonsense and that the market will continue to deliver the same kinds of returns as during the 80s. A recent survey by the Consumers' Association showed that many providers are still pushing endowments and giving a misleading picture of likely returns. The motivation is obvious: they make seven times more money that way.

Investment advice is tricky. So much depends on whether history is a good guide to the future. But one thing is clear: the last place to go to for reliable advice on investment is the personal finance industry when its charging structures give it an incentive to favour some products above others.

The trade secretary, Stephen Byers, promised last weekend that the government would unveil tougher regulations for mortgage selling before Christmas. He believes that for most people, an endowment mortgage is the wrong choice. It is still a choice that one in four new homeowners are making.

There are some markets where consumer choice is clearly not the most important principle at stake. Caveat emptor is no longer an adequate response when people's personal financial security is threatened by a crooked industry which fails to make clear how much it is creaming off in charges. Deregulated markets have been disastrous for both pensions and mortgages.

In the meantime, when the begging letter drops through your letterbox, stick your cash in the post office or in a tax exempt individual savings account and use that to pay off the shortfall. Don't give them any more of your money.