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technical note

endowment savings plans - charges

overview

This section of the website looks at the charges applied to qualifying savings plans. These plans are generally referred to as "endowments".

Under a qualifying savings plan, the consumer pays a regular premium (usually monthly) and a lump sum is paid out at maturity.

The most common types of products we see are:

  • ten year savings plans;
  • endowment savings plans; and
  • maximum investment plans.

The majority of these plans are sold by life assurance companies or by their "tied agents" - representatives employed by an authorised business who act on behalf of, give advice about or sell products marketed only by that particular business.

However, we do sometimes see cases where a plan has been sold by an independent financial advisor (IFA). Specific rules apply to sales made by IFAs and we will take these into account when considering these complaints. 

This note looks at the effect of charges and deductions on qualifying savings plans and the impact of these costs on the ability of the plan to generate a worthwhile return for a consumer.

It does not cover endowments linked to mortgages – although the factors discussed could apply to any form of savings plan or endowment. Mortgage endowments are covered in more detail here

qualifying savings plans

Very simply, if a savings plan is "qualifying" it means that the profits that come from the plan are not subject to tax.

In order for a plan to be qualifying it must meet the three main criteria of HMRC directive IPTM2020. This says that: 

  • the policy term must be for ten years or more;
  • premiums must be paid yearly or more frequently and be "reasonably smooth"; and
  • the "sum assured"ust not be less than 75% of the total premiums to be paid.

There may be some variations on these requirements - but they remain the core principles of a qualifying plan.

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how the plan works

A consumer will usually pay a fixed premium over the life of the plan. A certain amount of the premium is taken to provide for life assurance - referred to as the sum assured. Life cover is needed for the plan to be "qualifying" and the proceeds to be tax free. The remainder is invested in a nominated investment fund - often a "with profits" fund.

Most plans have a fixed maturity date, although some policies do allow for the maturity date to be extended for a further specified period.

When the policy matures, the proceeds are paid to the consumer as a lump sum free of any further tax liability. Some plans allow for the policy proceeds to be converted by the product provider to provide an annuity.

If the consumer dies before the maturity date, the plan will usually pay out either the sum assured or the value of the investment fund - whichever is the greater at the time.

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types of complaints we see

The main purpose of a savings policy is to save for the future and gain a positive return. So when considering a complaint, we will decide whether the plan was a worthwhile investment. We will also look at whether the policy was suitable for the consumer in the first place.

If there was any likelihood at the time the advice was given that the return would be less than the amount the consumer would be investing, the reasons behind the choice of policy will be particularly important.

The most common problem with these plans is the effect of the cost of life cover and other charges on the final return. These costs sometimes mean that there was little chance of getting a worthwhile return unless the fund had grown well above any reasonable estimate.

Sometimes we find a consumer has complained about the amount the policy has returned - but the more significant issue is the suitability of the plan from the outset. Although we are not able to consider complaints about performance of an investment, we can look at whether the policy was suitable for the consumer's needs.

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issues we will consider

We consider a number of issues when a complaint about an endowment savings plan is referred to us.

reduction in yield

The business should have an illustration from the point of sale showing the projected return on the plan after the cost of life cover and any charges have been applied. The difference between the projected return and the projected return after costs have been are applied is known as the "reduction in yield".

If no illustration is available, we may need to ask the business for more information about the costs of the plan and take them into account, along with any other information provided, to determine whether we think the plan offered the realistic prospect of a reasonable return. But in most cases, we would expect the business to be able to provide or recreate an illustration.

If the illustration showed that the return would be less or only marginally more than the amount to be paid into the plan, we will consider whether the consumer was aware of this when the plan was taken out. If this outcome was not discussed with the consumer, we are unlikely to agree that it was made clear - even if it was shown on an illustration.

We generally think it is unlikely that a consumer would choose an investment if they were made aware that they would be getting back less than they paid in. If we decide that this was not made clear to the consumer, we are likely to say that the plan was not suitable.

Although there is no specific definition of a "worthwhile" investment, we take a pragmatic approach. We will consider the reasons why (if there are any) someone would choose to invest in a plan that - assuming reasonable growth - would return less than if they held the money in a bank account.

We will then decide whether the consumer has been financially disadvantaged by entering the plan.

Because the plan proceeds are paid to the consumer without any tax liability, we will look at the total return to the consumer - so it might appropriate to look at the gross return received. This is more relevant in cases where the consumer is a higher-rate tax payer.

industrial branch sales

"Industrial branch" is a generic term for policies where the premiums are collected regularly from a consumer's residence by a collection agent.

The cost of this method of collection means that the charges are usually higher than policies where premiums are paid from a bank account. So this is the most common type of policy we see among complaints we receive about charges. 

An industrial branch policy is not necessarily unsuitable. But we will carefully consider what was explained to the consumer at the time it was sold to them, especially if the agent was selling door-to-door and we find the plan is materially different from the same plan sold in a branch.

the consumer's age

Charges tend to be higher for older consumers - possibly because a greater deduction is made for the cost of life assurance. Although the consumer's age is not by itself evidence that a plan was unsuitable, we need to look closely at what was explained to the consumer at the outset.

the need for life cover

The issues above are based on the assumption that there was actually no need for the life assurance provided by the policy - because the consumer wanted the policy mainly for savings.

But the cost of the life cover - which is included in the deductions made from the plan -  obviously has an effect on the policy's performance. In some cases, the deduction might make a significant difference to the return the consumer receives - even though they do not actually need the cover. So we will look carefully at whether the consumer needed the life assurance or not.

The actual cost of the life cover can vary substantially - depending on the age of the consumer when the plan started. If we decide the consumer needed life assurance, we will work out the actual cost of the life cover as a percentage of the premium. We may still uphold a complaint even this percentage is very small.

If the reduction in yield is large but it is not being caused by the cost of life assurance, then we will look at what other charges might be responsible - and whether these mean the plan is unsuitable.

execution only sales

"Execution only" sales are those where no advice has been given to the consumer - for example, if the consumer responded to a mailshot. In cases where the business says that an investment was "execution only", we will need to look very closely at how the plan was taken out.
If we believe that the sale is execution only and that the consumer did - or should have - understood that, we are unlikely to uphold the complaint.

But even where the consumer started the plan as a result of a mailshot or an illustration, we must be satisfied that the information provided was sufficiently clear, fair and not misleading for the consumer to make an informed choice. If not, the sale is still in question because the execution was based on inadequate or misleading information.

Since 1 December 2001 illustrations have been required to be balanced in the presentation of information. More information about our general approach to complaints involving financial promotions is available on our online technical resource.

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putting things right

If we are satisfied that the policy was not suitable as a general savings vehicle for the consumer, we are likely to uphold the complaint.

Our general approach to putting things right is to place the consumer in the position they would be in if they had not been given the incorrect advice to take out the plan.

In these cases, we will usually recommend either:

  • that the business should refund the premiums paid into the plan and compensate the consumer for lost investment opportunity (less the surrender or maturity value); or
  • that the business should refund the premiums paid plus interest.

In some cases where we have decided the consumer needed the life cover provided by the policy, we may say that the cost of the life cover should be deducted from the compensation amount.

More information about the tax implications and an answer to the question "is compensation taxable?" is available on our online technical resource.

Many consumers who have taken out endowment plans will have been classified as "low risk" - whereas they should have been classed as "risk averse". We always consider what the consumer would have done with their money if they had not taken out the savings plan.

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help for businesses and consumer advisers

contact our technical advice desk on 020 7964 1400

This is part of our online technical resource which sets out our general approach to complaints about a wide range of financial products and issues. We would like your feedback on how helpful you found it. Please also use the feedback form below to tell us about anything you think we could clarify or explain better.

calculations
  • The law requires us to decide each case on the basis of our existing powers and what is fair in the circumstances of that particular case.
    We take into account the law, regulators' rules and guidance, relevant codes and good industry practice at the relevant time.
    We do not have power to make rules for financial businesses.
    Our current approach may develop in the light of circumstances disclosed by further cases we receive.
    We may decide that fairness requires a different approach in a particular case.