Endowment shortfall - Offer

I gather the policy was cashed in early. How early? And what proportion is 14k of the originally expected maturity value?

Remember, the point of cashing in early is to deprive the policy of the opportunity of leaving you with a shortfall as high as predicted.

Suppose we speculate that the performance of the policy was uniformly poor throughout its life. Then, if the shortfall

*at maturity* would have been 14k relative to what you would have expected the maturity value to be, then clearly you would expect the shortfall *now*, several years prior to maturity, to be much less than 14k relative to what it would have been worth now.

For a 25 year policy I'd expect the shortfall 5-6 years prior to maturity to be about half what it would be at maturity.

Not that that's how they would calculate compensation, but it helps to put things into perspective.

Maybe I wasn't too clear on some points:

The full amount of the predicted shortfall. The predicted shortfall at the end of the term is £14k. They have been offered £7k.

They cashed in another policy on the advice that they took out (and still have) a new one. The predicted shortfall is £14k and they have been offered £7k. So, if they continued paying into the policy, they would be £7k short on maturity.

I understand that if they go for full compensation, they could end up with nothing. My question is, does anyone know what the chances of getting *full* compensation are?

Not quite they wouldn't. They would invest the £7k of compensation money somewhere, so it would grow over however much of the term is left. It would grow to £7k-plus-a-bit, or perhaps even plus-a-lot, so the effective shortfall would be less.

Also, it's not clear which policy you're talking about. Did the policy the cashed in have a 14k shortfall projection before they cashed it in, or does the new one have it now? Which one was mis-sold and which one is the compensation for?

What on Earth makes you think they could be entitled to what you call full compensation? At best you could hope to get the amount by which the present value is short of what the present value would gave to be in order for the projection to show zero shortfall at maturity.

Answer the questions: How long was the policy term, and how many years would there have been left to go? What was the originally expected maturity value? A £14k shortfall is a bit meaningless without a reference value. Was it 14% of £100k or 28% of £50k, for example?

Yes, of course they would invest the £7k elsewhere. But I don't expect them to get a 100% return on it so there is going to be a sizeable shortfall.

I don't have any details about the policy they cashed in. I am not aware it was heading for a shortfall. The one that was mis-sold was the one they have at the moment (because it isn't going to give enough at the end). It was sold to them on the assurance it would cover their mortgage and provide a surplus. It was sold on a risk free basis. It has not done this and that is why they have offered compensation (as many thousands of other people have).

That is what I mean by *full* compensation. The full amount needed to clear the outstanding debt on maturity. What else could I have meant?

25 years

and how many

7 years

What was the originally

£70K

A £14k shortfall is a bit meaningless

My query isn't really related to the numbers, it's more about the process of getting compensation for mis-sold endowments. They have been offered £7k which will leave them £7k short. If they appeal against this offer, do they stand a reasonable chance of getting an amount closer to what is required or should they accept this. Obviously there is risk associated with declining the offer but I'm looking for advice on the chance of getting a better offer.

People do sometimes get better offers, but you usually have to show why it is justified and do a bit of number crunching. The main basis for compensation is not to refer to the shortfall, which is an estimate. It could be more or less than that.

They work out the compensation to put you in the situation you would have been in if the endowment had never existed. So if they had taken a repayment mortgage they will work out how much of it would have been paid off by now. They should then compare that with the surrender value of the endowment, and compensate them for the difference.

I'm not sure how they deal with the churning (getting them to sell one policy to buy a new one)

Read the FSA website which contains a lot of information and approach the company with relevant details rather than talking about full compensation.

Neb

No, what I've just described is nothing like what you mean. Because the fund value profile follows an exponential curve, the *present* equivalent of the *future* shortfall will be a lot less.

Well, if the policy were maturing now, and the shortfall now would be £14k, and you had only just noticed that you had been mis-sold, then £14k compensation might be reasonable. But it's not maturing now, so an adjustment needs to be made for the time effect.

Suppose that at the time they sold the policy they had optimistically estimated 8% fund growth per year, and on that basis calculated that

300 monthly premiums of £77 would be enough to save up a fund of £70k. On that basis, the fund at month 216 (i.e. at year 25-7) should be about £36k. You may find this surprising, that half the growth happens in only the last 7 years or so, but that's just the way it is.

It stands to reason that a shortfall of £14k at maturity would, if occasioned purely by the growth rate having been lower than had been expected, correspond to a shortfall in the fund value *now*, relative to the £36k target value for now, of also about half.

Therefore £7k does not seem wildly out.

Meanwhile they've revised their growth rate prediction to (say)

7%pa, and find the fund value now is only £30k, and on that basis they predict that, with £77pm still coming in, the maturity value will be only £56k (i.e. £14k less than planned). That of itself doesn't justify a compensation payout *now* of £14k, because the "now" fund is only £6k short of what it ought to have been, so one argument might be to give you that. Another is to see how much higher the now-fund would need to be in order to bring the maturity value back on target, and that's rather higher, about £8.5k.

Certainly £7k seems to be in the right ballpark.

What they actually do is look at what your balance would be if you had opted for a repayment loan originally, and if they find you would have paid off (say) £38k by now, and their fund is £30k, then they'd give you £8k, which would put you in the same position you would have been in had you not opted for the policy.

Just how much would have been paid off in 18 years using a repayment loan depends on the loan interest rates which actually applied throughout those 18 years.

Not sure. You just have to negotiate with the endowment provider and if you can't reach satisfactory resolution you can escalate to the relevant ombudsman who can order them to pay you what he thinks is right.

Chances are, though, that they're using the approved formula anyway, and in any case you can ask them to explain to you the basis of their calculation. That should make the picture a bit clearer.

On the basis of what you've said, it looks a reasonable offer.

One thing you didn't say was what the plans are. Is the policy being surrendered and the £30k-ish fund being paid out, plus the £7k compensation, or is the policy to be kept going? Either way, it would be a good idea to use the payout money to reduce the mortgage loan. If the policy is being cashed in, the proceeds ought also to go there.

I think the best approach would be to ask them to explain how they've calculated the amount they are offering. Then come back here, tell us what they've said, and ask again whether it's worth taking further.

In message , Uncle_Jarvis writes

Using your definition of 'full compensation' then NIL. The £7k is the shortfall today. Thats all you can get.

In message , Uncle_Jarvis writes

Investing £7k at 5% per annum compound, would result in around £9850 after 7 years. Invested at 10% per annum would result in £13650 after 7 years.

£11,000 at a risk free 4% would generate £14500 after 7 years.

(Assuming my calculations are correct)

Remember that just because the endowment shortfall is £14,000 doesn't mean that the loss as a result of taking it out is £14,000.

Your compensation should be calculated to put you in the same position as you would be in had you taken the less risky but more expensive repayment mortgage.