30,000 reasons to worry

By THIS IS MONEY
Updated:

 

We started a Home Purchaser Plan with Scottish Amicable in November 1993 for £50,000 over 12 years, set to expire in Oct 2005. But with just over four years to go my figures show a shortfall of nearly £30,000.

We would have paid in £41,454 for the total 12 years and at 31 December 2000 the with-profits total was £20,769. We are desperately worried that this cannot possible reach £50,000 in four years. It was arranged through financial adviser. What can we do? P, Milton Keynes.

David Hollingworth of mortgage brokers London & Country, says: This is an endowment and endowment investments are based on the performance of the stock market, so there is always a risk that the endowment will not reach its target value.

With-profits endowment policies pay bonuses, usually annually, called reversionary bonuses. Although not guaranteed, once they are paid they cannot be taken away. But there is another bonus - the most important - that is paid at the end of the term, and this usually much larger than the reversionary bonuses and in some instances can make up a substantial proportion of the maturity value.

First get confirmation from Scottish Amicable of the projected value of the policy. This should give a better indication of the size of shortfall, if any. If you do have a shortfall then you must look at ways to make it up. You could pay into an alternative investment such as an individual savings account but again, with a stock and shares ISA there is a risk that it may not reach the target.

Or you could switch the shortfall amount on to a repayment mortgage basis so you chip away at the shortfall over the remaining term leaving the endowment to clear the balance. It may be worth looking to remortgage to a cheaper rate at the same time. When assessing whether to switch lender find out if you are tied in to your current mortgage and take account of any penalty you may have to pay for moving.

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