As a result of recent market volatility, UK homeowners who took out endowment policies in the 1980s and 1990s in order to pay off their mortgages have seen their returns fall again this year, with some of the UK’s leading insurance companies declaring reduced annual bonuses.

Scottish Widows, Friends Provident and Norwich Union have all declared reduced annual bonuses for With Profit Endowment policyholders leaving homeowners with increased deficits on their mortgage liabilities.

Annual bonus declarations are determined by a number of factors including past investment performance, previous bonus announcements and a company’s financial strength.

For example, a man, who, at aged 30, took out a 25 year Scottish Widows endowment policy paying £50 per month, could expect to see his payout reduced by £442 from £38,578 in 2007 to £38,136 in 2008, while a Friends Provident policy, on the same terms, would have seen a 2007 payout of £37,540 reduced by £1,025 to £36,425 in 2008.

A Norwich Union endowment policy on the same terms would have paid out £39,357 in 2008 compared to £42,133 in 2007 – a difference of £2,776, and for Scottish Life policyholders, the difference is 8.5 per cent; with a payout this year of £34,196 compared to £37,132 in 2007, which is a reduction of £2,963.

But it is not all doom and gloom; Standard Life has actually increased payouts on With Profit Mortgage Endowments paying £37,763 this year compared to £36,950 in 2007 on a policy on the same terms. Prudential and Legal and General have also bucked the trend by announcing increases over 2007.

“With increased volatility in world stock markets this year the prospects for improved bonus returns for 2008 don’t look promising,” said James Caldwell Director of Fairinvestment.co.uk.

“With Profit Endowment policies are designed to provide a level of insulation against turbulent investment markets however it is the stronger UK insurance companies who are better positioned to smooth investment returns over the long term.

“Policyholders whose endowments continue to under-perform should have received a warning letter from their insurance company outlining the potential shortfall. It is important to address any potential shortfall in your endowment before it is too late.”

Mr Caldwell sees three main courses of action – surrender, sale or complaint.

“If you are unhappy with the way the policy was sold to you, you can make an endowment complaint to the provider – more information on making an endowment complaint can be obtained from the Financial Services Authority.

Surrendering the policy is also an option, says Mr Caldwell, but with a relatively strong secondhand endowment market, selling is certainly an option for people looking to get rid of their policies.

“However,” warns Mr Caldwell, “if you are uncertain of what to do, you should seek independent advice. For many existing endowment policyholders selling endowment has been a preferred way of getting back cash rather than surrendering the policy back to the insurance company.

“Often, the surrender value offered by the company is a relatively poor deal, but there are investors who are prepared to buy endowments because of their non income producing nature and partially guaranteed return.

“Selling your endowment through an endowment trader can get you up to 35% more depending on the policy you have,” said Mr Caldwell, “so if you are looking to get rid of your policy it is worth looking into getting a quote before simply settling for the surrender value.”

© Fair Investment Company Ltd