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A mortgage tied into a pension scheme seemed such a good idea in 1989. Interest rates were high, shares were booming and the plan screamed "tax-freedom". The contributions could be set against tax; the fund grew free of all taxes; and there was a big tax-free lump sum at the end. You could not lose. Or could you?
Trish Stott thought she was on to a good thing when she signed up to an Allied Dun bar pension mortgage plan which promised to pay off her £30,000 home loan, give her a lump sum and provide for her retirement.
In 1995, the insurer said she could have her loan paid off and collect £13,700 in tax-free cash as well. Now, with 12 months to go before her plan matures, she faces a potential mortgage shortfall of £15,200 - more than half the sum she owes home loan firm Alliance & Leicester.
Even with the most optimistic projected figures allowed by the Financial Services Authority, she will still be £7,500 short.
Her pension hopes are shot to pieces, as well. The 1995 statement shows a £14,400 a year lifetime income, but the latest projection points to a £4,790 annual pension.
She is likely to end up with a pension pot of between £108,000 and £112,000 for the £86,982 she will have paid in by next March.
"I have no idea how I am going to pay off the mortgage. I have no significant savings outside this pension plan," she says.
But initially she was told how lucky she was that she had the earnings pattern to qualify for a pension loan. The alternative was to settle for an endowment-linked mortgage that would give her a lower payout.
But while endowment mortgage mis-selling is top of the agenda, pensions loan victims have been ignored, even though there are an estimated 500,000 facing a shortfall. Yet many face bigger problems and have less flexibility than endowment purchasers (see box).
Now 15 years later, Ms Stott has discovered that the more she pays in, the further away her mortgage repayment target moves.
Although the equity bear market takes some of the blame for her underperforming, she has also had to contend with hidden costs which have absorbed much of her savings. "Everything I was promised turned out to be pure fiction. I am stuck in this. I have received very little advice from Allied Dunbar. There is no Plan B to save me," says Ms Stott, who owns a language and communications skills training consultancy in York.
Ms Stott, 59, first became aware of Allied Dunbar - now known as Zurich Financial - because a family member briefly worked for it. Signing friends and family was a classic way for insurance sellers to recruit purchasers. "I bought a £20-a-month savings plan in 1986. I never thought of looking elsewhere in 1989 when I needed financial advice prior to getting a mortgage. By the time I had finished, my £20-a-month plan had become around £400 a month," she says.
But her pension mortgage spending did not stop there. Her plan was linked to annual increases tied to average national earnings.
Every year, the amount she paid went up - she is currently paying in more than £700 a month. But she did not know how much Allied Dunbar grabbed in costs which depressed her investment return.
Her payments bought units in Allied Dunbar's managed and equity funds. But all the units purchased for the first two years - and that includes the first two years of subsequent premium increases - went into "capital units". The rest went into "accumulation units".
Annual charges on capital units are a staggering 4.25% - so her investment has to gain 4.25% a year before her pension moves forward. But accumulation units typically attract a 0.75% annual charge. Of the 2,682 units she bought, 1,080 (or 40%) are charged at the higher rate.
Allied Dunbar says her fund has deducted £5,669.52 in charges since the plan began. But while this includes £3,752 for the gap between the price she paid for units, and the price they were worth - the bid/offer spread- and £1,427.29 for life cover over the term of the pension, it does not include the 4.25% capital unit charge or the £3,685.11 premium waiver - an insurance which would pay her premiums if she had been unable to work.
Allied Dunbar was unable to calculate the costs of capital units within our deadline - even though it was given three days notice. But £20,000 is one estimate.
And because the capital units are those that have to work the longest, the effect on her plan is more marked.
"I was never aware of this cost structure. It was never explained to me," she says.
Nor was she aware that the costs might have been lower had she bought a separate single premium plan each year. This could have been tied to her business success.
"When profits fell it was difficult as premiums would go up whether or not I could afford it," she says.
But she kept up the payments - luckily as the small print showed she would get nothing back if she quit in the first five years.
Despite paying huge costs, she received no specific information on moving her volatile assets into safer havens - cash or bonds - as she approached retirement. "All I got were vague letters with things to consider. I needed face to face advice."
Allied Dunbar says: "Mrs Stott was written to in 1999, to point out the existence of the fixed interest deposit fund.
"This suggests that customers consider consolidating their investments into this fund, but points out they should take advice as the decision should be based on individual circumstances."
But the insurer adds: "Advisers were not authorised to give investment advice."
Promising so much and delivering so little
Pension mortgages were sold as an alternative to endowments. Their attraction was tax freedom - personal pension purchasers could get up to 40% tax relief on premiums as well as seeing their fund grow without income or capital gains tax worries, writes Tony Levene .
And when buyers retired, they would get a tax-free lump sum to pay off the home loan, as well an annual income for life. Most plans also promised a cash surplus.
The tax freedom meant they should have grown faster than an endowment, even when the underlying investments were the same. And the personal pension regime, which started in 1988, offered a clear vision of the tax-free lump sum - savers could take up to 25%. The earlier "retirement annuity pensions" (such as the one sold to Trish Stott) offered lump sums, but with opaque actuarial conditions. But in some cases costs could erode much of the tax benefit. Around 500,000 were sold - com pared to 11m endowments. But most were sold at the top end of the market to back huge mortgages. "These were very much a niche market," says pensions expert Steve Bee at Scottish Life.
What to do now
Many pension mortgage purchasers now face serious loan shortfalls. But pension providers have no obligation to send out red, amber and green warning letters.
But you can ask for an illustration and then complain to the company or independent adviser concerned - and if that fails, to the ombudsman. Here are some tips.
· Never complain about investment performance alone, even if that is the root of the problem.
· Was the risk suitable for you? Did you know about possible shortfalls? Was the payment "guaranteed"?
· Did you have shares or savings or were all your eggs in a pension basket?
· See if you were sold a regular premium pension.
These are generally seen as inappropriate for the self employed with their uncertain earnings patterns who should have had the flexibility of lump sum payments.
· Check if the seller came up with advice on how you would pay back the loan if you ceased to be eligible for a personal pension.
· Did the mortgage stretch into your planned retirement years? If so, it could be unsuitable for you.
· Have you received continuing advice - especially if the adviser is still earning from your plan?
You should have "lifestyle" options over the eight to 10 years before retirement so you can move your fund into safe assets.
Newer schemes may offer "lifestyle" as a default option.
What to do now
Many pension mortgage purchasers now face serious loan shortfalls. But pension providers have no obligation to send out red, amber and green warning letters.
But you can ask for an illustration and then complain to the company or independent adviser concerned - and if that fails, to the ombudsman. Here are some tips.
· Never complain about investment performance alone, even if that is the root of the problem.
· Was the risk suitable for you? Did you know about possible shortfalls? Was the payment "guaranteed"?
· Did you have shares or savings or were all your eggs in a pension basket?
· See if you were sold a regular premium pension.
These are generally seen as inappropriate for the self employed with their uncertain earnings patterns who should have had the flexibility of lump sum payments.
· Check if the seller came up with advice on how you would pay back the loan if you ceased to be eligible for a personal pension.
· Did the mortgage stretch into your planned retirement years? If so, it could be unsuitable for you.
· Have you received continuing advice - especially if the adviser is still earning from your plan?
You should have "lifestyle" options over the eight to 10 years before retirement so you can move your fund into safe assets.
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