Should I ditch my endowment?

Heather needs to get her finances in order before she reaches retirement. She writes:

'I work in the voluntary sector and have never been that interested in money before. But now I'm 54, I think I should get a bit organised. One of the most pressing decisions I need to make is about my endowment mortgage. I have just received a warning letter that the policy is not likely to cover the mortgage repayment. The broker who sold me this endowment is no longer in business and because I took the plan out in 1986, I believe I cannot make a complaint about misselling. Is this correct?

My bank, First Direct, says if I converted to a repayment mortgage for 10 years I would have to pay £350 a month including a life insurance policy (I have three sons). They say I have to borrow a minimum of £30,000 (although my actual mortgage is only £25,000). The repayments would be about £150 a month more than I pay at the moment. Is this a good idea? And what should I do with the endowment? It seems silly to be paying £60 a month for something that is decreasing in value.

I have about £30,000 in savings which I inherited from my mother and could have paid off the mortgage altogether. But about £20,000 of this is already committed to dental treatment; and I plan to spend about £2,500 on home improvements. Other than that I save £150 in an Isa and £100 a month for repairs for my old banger of a car.

I suppose I ought to be worrying about my pension too - I am due to retire at 60 and think I should be getting about £8,000 a year in pension. I'm not actually too bothered as I have a large house in Spain without any mortgage which I could always let or sell if things get really bad. My other thought was to use what was left of my inheritance after the teeth-money to try to borrow more in order to buy a property in the north of England to rent, possibly with my sister, who lives there.'

Action plan

You are right that anyone sold an endowment
mortgage before 1988 cannot normally complain about
mis-selling. The Financial Services Act covers only
endowments sold after 1988, although some
companies will consider claims for policies sold
beforehand. So it may be worth finding out if the broker
you dealt with was taken over by another firm that took
over the liabilities for the advice given. If this is so and
you can complain, you need to bear in mind that the
fact the endowment may result in a shortfall is not an
acceptable cause for complaint.

The most important issue is whether the policy was
suitable for you in view of the risk that it involved and
your attitude to risk at the time you took it out.

Assuming you find you cannot complain, there are
differing opinions about what you should do. Gillian
Cardy, of independent financial adviser Professional
Partnerships, says: 'Heather should look at
surrendering the policy now. She could use the
proceeds to repay the bulk of the mortgage and then
remortgage to a lower rate. The new mortgage should
be set up on a repayment basis, so that it is repaid by
her planned retirement date.'

However, Ray Boulger at independent adviser Charcol
believes that 'on balance' you should probably leave
your mortgage on an endowment basis. There is a
good chance that the value of your endowment has
now started to increase, thanks to the recovery in the
stock market. You will probably have already incurred
most of the charges on your endowment, so most of
any future growth will go straight through to its value. If
you surrender the policy and need to take out
replacement life insurance it will be much more
expensive to do this at 54 than when you first took out
the policy.

All the same, Boulger also recommends that you
switch to a mortgage with a lower interest rate,
assuming there are no redemption penalties on your
current one. As your mortgage is only ?25,000, you
need a remortgage deal where there are low costs or
no costs at all. Both Cardy and Boulger suggest that
you could consider an offset mortgage. Boulger says:
'This will combine her mortgage with her savings in a
tax-efficient way.'

He says the most competitive offset mortgage deal at
the moment is offered by Abbey. This charges base
rate plus 0.75 per cent for the whole term, currently 4.5
per cent. It offers a free valuation, free legal work and a
low,?150, arrangement fee.

You could then switch your savings to the savings
account, which will be linked to your mortgage but will
allow you to draw out the money as you need it. With
this type of arrangement you pay interest only on your
net borrowing, and so initially you would pay no
interest at all. This means that if you maintain your
payments at the current level, you would be repaying
the capital and removing the potential mortgage
shortfall.

Boulger cautions against using any spare capital as a
deposit on a buy-to-let property. He says: 'Even if
Heather's sister contributed half the deposit and costs,
she really has too little capital available and would have
no cash reserves to cope with any problems.'

As to your pension, Cardy points out that you could
use other assets to generate a retirement income,
such as your Spanish property, as you suggest
yourself. What is more important now is to identify
your longer-term goals and then calculate how far you
are towards achieving them and what other provision
you need to make.

Cardy says you need to work out what income you
think you will need to live on in retirement, what you
can expect from your current arrangements and what
is the shortfall.

So the first thing you should do is obtain forecasts of
your state and occupational pensions. If there is a
shortfall, can you make this up from renting out your
Spanish property? If not, you really do need to start
saving more now. You could consider making
additional voluntary contributions to your pension
scheme or put more into Isas.

Heather's to do list

1. Find out if your old mortgage broker was taken
over. You may be able to make a mis-selling
complaint if a new firm has taken over its
liabilities.

2. Weigh up the benefits of surrendering your
endowment policy or keeping it on.

3. If you surrender you could pay off the bulk of
your mortgage now with the policy proceeds.

4. If you keep your policy you could remortgage
to an offset mortgage and use your savings to
help pay off your mortgage more quickly.

5. Purchasing a buy-to-let property is not
advisable given your limited resources.

6. Find out how much state and occupational
pension you can expect (contact the Retirement
Pension Forecasting and Advice Unit on 0845 3000
168) and consider your other sources of retirement
income.

7. If there is a shortfall between your expected
pension, you will simply have to bite the bullet
and start saving more.

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