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technical note

complaints about mortgage endowments into retirement

overview

We regularly see complaints from consumer who are concerned that their endowment policies are not due to mature until after they plan to retire. 

Usually these consumers are worried how they will meet the monthly mortgage and policy payments after their retirement - and how they would meet any shortfall, when their endowment policy matures, from their retirement income and savings.

The fact that an endowment policy matures after retirement can be relevant to the way we consider:

  • complaints about risk
    When a consumer complains to us that the policy was unsuitable for them because they were not prepared to risk any shortfall, we take the maturity date into account when we consider whether the case.
  • appropriate compensation in complaints about risk
    When we decide that, with appropriate advice, the consumer would not have taken out an endowment policy in the first place - preferring a repayment mortgage instead - we have to decide for the purposes of calculating compensation what the term of the repayment mortgage would have been.
  • complaints about the affordability of the endowment
    These are cases where the consumer accepts, or we decide, that they were prepared to risk a shortfall - but the consumer says that the adviser should have recommended a policy with a shorter term.

This section of our website gives more detailed information about our general approach in these types of cases.

considering complaints about mortgage endowments that run into retirement

Typically, consumers with endowment policies that run into retirement say that:

  • they were not prepared to take the risks associated with the endowment policy - and that the adviser should not have recommended they take out the policy in the first place; and
  • they were poorly advised to take out a policy with a term that ran past their retirement - and that the adviser should have recommended a policy with a term that finished before they retired.

our approach

First of all we look at whether we consider the consumer was prepared to take the risks associated with the endowment policy. Our approach after that depends on the decision we reach about this.

consumer was not prepared to take risks

When we decide (or the financial business accepts) that a consumer was not prepared to take the risks associated with an endowment policy - and that with suitable advice the consumer would have taken out a repayment mortgage instead - we then go on to consider what the term of the repayment mortgage would have been. This is a question of calculating compensation.

In these cases, we do not consider whether the adviser should have recommended an endowment policy with a term finishing before retirement - as we have decided that, if properly advised, the consumer would not have had an endowment policy at all.

consumer was prepared to take risks

When we decide that the consumer was prepared to take the risks associated with an endowment policy, we then go on to consider the consumer's complaint about the advice to take out a policy with a term running into retirement.

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calculating compensation: what would the term of a repayment mortgage have been?

calculating compensation

When deciding compensation in mortgage endowment complaints, we generally aim to put the consumer in the position they would now be in, if they had taken out a repayment mortgage instead.

In most cases, compensation is calculated by comparing the consumer's position with the mortgage endowment with the position they would now be in with an equivalent repayment mortgage.

Unless there is persuasive evidence that the consumer would have taken a different approach if they had taken out a repayment mortgage, we generally assume that the consumer would have borrowed the same amount on the same mortgage terms and conditions. For example, we are likely to assume the same interest rate would have applied to a repayment mortgage.

when the term of the endowment runs into retirement

We recognise that the circumstances that led the consumer to take out an endowment with a term running into retirement might not necessarily have applied - if the consumer had taken out a repayment mortgage.

So when we decide the appropriate redress, we consider whether the consumer would have taken a different approach on a repayment basis. We decide this by looking at the individual circumstances of the case.

To help us decide the likely term of the repayment mortgage, we take into account common factors that might suggest calculating compensation assuming:

In most cases, a number of factors will be relevant - some favouring a longer term and others a shorter term. We have to weigh up the competing information, to decide the term of the repayment mortgage that we think the consumer is more likely to have selected.

The importance and weight we give to any particular factor will depend on the overall circumstances of each individual complaint. Although the circumstances of particular cases may appear at first glance to be similar, they are rarely identical. This means that we may reach different conclusions - or place different emphasis on the various factors - depending on the overall circumstances of each case.

time limits

Some financial businesses argue that our looking at what the term of a repayment mortgage would have been is "time barred" under the complaints-handling rules. They say that the consumer would have known (or should have known) at the outset that the policy and the mortgage ran into their retirement - and so the complaint is now too late and out of time.

It is true that complaints about affordability after retirement might be "time barred" for these reasons. But whether or not we can consider this separate question will depend on whether the consumer's complaint about the risks associated with the endowment policy is "time barred".

deciding the likely term of the repayment mortgage: common factors that might suggest calculating compensation assuming the same mortgage term

term  
the endowment term

This can often be a helpful indication of the term that the consumer would have selected, if they had taken out a repayment mortgage instead. It might suggest that the consumer was comfortable with the term - when under the mistaken impression that the endowment was certain to repay their mortgage at the end of the term.

The consumer might have taken the same view when selecting a repayment mortgage term (which is certain to be repaid at the end of the term, assuming all payments are made).

monthly cost

If it would have cost the consumer more to take out a repayment mortgage on a shorter term, this might have discouraged them from doing so. The higher costs might have been difficult for the consumer to meet, or simply unattractive.

In some cases we decide that the cost played little part in the overall decision - and that the consumer could have afforded a variety of terms finishing before and after retirement.

length of over-run

If the consumer's mortgage runs into retirement by only a few months, it might not have been of particular concern to them. The consumer might have taken the same view with a repayment mortgage.

If the consumer's mortgage runs into retirement by several years - meaning that the consumer would have had to take out a mortgage with a particularly short term to coincide with the date of their retirement - then it is less likely that we will decide that the consumer would have selected a repayment mortgage with a term running into retirement.

pension arrangements

If the consumer had pension arrangements in place (or other savings) to meet their mortgage payments after they retired, this might lend weight to the possibility that the consumer would have taken a repayment mortgage with the same term (if there are also other reasons to suggest the consumer might have done so).

non-standard terms

Many mortgages have a "standard term" of 25 years. If the consumer's mortgage has a non-standard term, this might suggest a bespoke arrangement to fit the consumer's overall requirements - and might add weight to the possibility that the consumer would have taken a repayment mortgage with the same term as their endowment. But if the consumer selected that term for cost reasons, then it is possible that they would have selected a different term on a repayment basis for the same cost reasons.

other factors

There are a number of other factors that might lend weight to the possibility that the consumer would have taken out a repayment mortgage with the same term running into retirement. For example, we might consider:

  • Did the consumer have a particular plan in mind - say, to continue working after retirement, to use other savings to reduce their mortgage on retirement, or to "downsize" and repay their mortgage on retirement? If so, the consumer might have taken the same approach with a repayment mortgage.

  • Did the consumer have an existing mortgage or policy running into retirement?

  • Did the consumer switch an existing repayment mortgage to an endowment over the same term?

  • Did the consumer arrange a mortgage with a particular term, before deciding to take out the endowment policy?

deciding the likely term of the repayment mortgage: common factors that might suggest calculating compensation assuming a shorter mortgage term

term  
monthly cost

If taking out a repayment mortgage on a shorter term would have cost the consumer less than an endowment arrangement, this might have encouraged the consumer to do so - particularly if the endowment term was selected to match budget preferences or constraints, or if the consumer did not have pension arrangements. In some cases, we might reach a different conclusion - that the consumer would have taken the cheapest option of all - a repayment mortgage running into retirement.

This might happen when the consumer had short-term affordability concerns, or when the costs of all the possible arrangements were particularly high (for example, when interest rates were high) - making the cheapest option attractive.

overall costs

The total costs (over the entire term) of a repayment mortgage on a shorter term are likely to be less than the total costs of a mortgage over a longer term.

While we recognise this might encourage the consumer to take out a mortgage with a shorter term, we are mindful that consumer often take out longer term mortgages - preferring shorter term savings over longer term considerations like this.

pension arrangements

If the consumer did not have any pension arrangements (or other savings) - and so could have expected to have difficulty making payments to a mortgage after retirement - this might lend weight to the possibility that the consumer would have taken a shorter repayment mortgage (if there are other reasons to suggest the consumer might have done so).

the consumer's understanding

If the consumer expected the endowment to repay their mortgage by retirement (and did not expect to make payments after retirement), this might suggest they would have considered a repayment mortgage on a shorter term.

But if the consumer's understanding was that early repayment was only a possibility, this is unlikely to be persuasive.

other factors

There are a number of other factors that might lend weight to the possibility that the consumer would have taken out a repayment mortgage with a shorter term.  For example, we might consider:

  • Did the consumer have a particular plan for a repayment mortgage before they took out the endowment? There might be notes or illustrations from the time of the sale which suggest that the consumer considered a repayment mortgage with a different term.

  • Did the consumer have an existing repayment mortgage with a shorter term?

  • Did the consumer switch an existing repayment mortgage to an endowment - and in doing so, extend the term at the business's suggestion?

  • Did the consumer arrange a mortgage with a particular term before deciding to take out an endowment with a different term?

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calculating compensation: cases studies showing our approach

In these case studies the consumers were not prepared to take the risks associated with an endowment policy. We had to decide, for the purposes of assessing fair compensation, what the term of the repayment mortgage would have been.

case study 1

Mr and Mrs A told us that the financial business had led them to believe their endowment was certain to repay their mortgage by the time they retired, 15 years into the 25-year term. They had not expected to make payments from their pension after they retired. They said that if they had taken out a repayment mortgage, it would have had a 15-year term.

We agreed that Mr and Mrs A might have taken out a repayment mortgage with a different term, if this was their understanding. But we thought it unlikely that Mr and Mrs A had been under the impression that their mortgage was certain to be repaid after 15-years.

We did not think it probable that their adviser would have led them to believe the policy would pay off their mortgage after only 15 years of the 25-year term. We thought it more likely that their adviser would have suggested it as a possibility - and that Mr and Mrs A were aware it was likely they would still have to make payments to their mortgage after they retired.

The cost of a 15-year repayment mortgage would have been considerably more expensive than Mr and Mrs A's 25-year endowment (and more than 50% of their take-home pay). Mr and Mrs A both had pension arrangements. Having considered their overall circumstances, we thought it likely that they would have taken out a repayment mortgage with the same 25-year term.

case study 2

Mrs B and the financial business were unable to agree on the terms of the repayment mortgage that should be used when calculating compensation. The financial business said that Mrs B had chosen an endowment term running into retirement because she could not afford a shorter term.

The financial business's records showed that Mrs B had considered - and had originally preferred - an endowment with a shorter term. But she had ultimately taken a policy with a longer term to keep the monthly costs within budget.

In these circumstances, we thought it likely that Mrs B would have taken out a repayment mortgage with a shorter term, if the costs were within her limited budget (as that is what she had wanted, but had been unable, to do with her endowment).

We calculated that a repayment mortgage with a shorter term would have cost less at the outset that an endowment with the same term. The monthly cost would have been similar to what Mrs B paid for her endowment arrangement.

So we told the financial business to calculate compensation assuming a shorter term for the repayment mortgage.

case study 3

Mr and Mrs C's endowment mortgage had a 25-year term maturing seven years after Mr C's planned retirement from the police force aged 52. The "fact find" completed by the adviser at the time of sale recorded that the couple planned to meet the mortgage payments after Mr C left the police using his police pension and any income from a new job.

Mr and Mrs C complained that the adviser should have recommended a repayment mortgage with a shorter 18-year term - and that compensation should be calculated on that basis. We thought it unlikely that Mr and Mrs C would have taken out a repayment mortgage with a shorter term for the following reasons:

Although Mr C planned to retire from the police at 52, he expected to continue working after that.

A shorter 18-year repayment mortgage would have cost considerably more each month than Mr and Mrs C's actual arrangements.

Mr and Mrs C were comfortable with their 25-year endowment mortgage when they thought it was certain to repay their mortgage at maturity. They expected to be in a position to make payments after Mr C's retirement from the police. We thought it likely they would have taken the same view with a repayment mortgage.

case study 4

Mr D was unhappy with the financial business's offer to pay compensation that put him in the position he would be in if he had taken out a repayment mortgage on the same 18-year term as his endowment - which ran five years past his retirement.

When he took out the policy, Mr D was moving house. He had an existing repayment mortgage with 18 years remaining. He worked for the local council and was a member of the council's final-salary pension scheme. Mr D told us that he discussed with the adviser how he would make the mortgage and policy payments after he retired from his pension income.

We decided that if Mr D had taken out another repayment mortgage when moving house, it would also have had an 18-year term. We decided this for the following reasons:

Mr D was comfortable with his 18-year endowment mortgage when he thought it was certain to repay his mortgage at maturity. He expected to make the payments after retirement from his pension income.

The monthly costs of an 18-year repayment mortgage would have been similar to the amount he paid to his endowment. A 13-year arrangement would have cost considerably more.

In these circumstances, it was likely that he would have taken the same view about the term if he had taken out a repayment mortgage - particularly as his previous repayment mortgage also had an 18-year term.

case study 5

Mr and Mrs E took out a 25-year endowment mortgage running three years past their retirement. They both had jobs, but did not have any savings or pension arrangements when they took out the policy.

While during times of lower interest rates, endowment mortgages are often cheaper than repayment mortgages, when Mr and Mrs E took out their policy in 1991, interest rates were particularly high.

Mr and Mrs E paid £580 to their mortgage and policy at the outset. We calculated that a 25-year repayment mortgage with life cover would have cost approximately £535 per month, while a 22-year repayment mortgage would have cost £575.

We thought it likely that Mr and Mrs E, in their circumstances, would have taken out a repayment mortgage with a shorter 22-year term. They did not have any pension arrangements and the cheaper 22-year repayment mortgage meant they would not have to make payments after they retired.

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complaints about affordability after retirement: an overview of our approach

This section gives further information about our approach, when we decide that the consumer was prepared to take the risks associated with an endowment policy - but the consumer has also complained that their adviser should not have recommended an endowment running into retirement, because they expected to have difficulty making payments after they retired.

This section does not cover our approach in cases where the consumer was not prepared to take the risks associated with an endowment policy.

our approach - continuing affordability

Some consumers - and their representatives - say it is always poor advice to recommend an endowment with a term running into retirement. Others say that providing "suitable advice" means that the adviser should have automatically recommended a term to coincide with retirement, if that term was affordable.

On the other hand, there may be legitimate reasons why a consumer might wish to take a policy with a term running into retirement.

However, we are likely to decide that an adviser should not have recommended a policy with a term running into retirement, if it was reasonably foreseeable that the consumer would have difficulty maintaining the policy (and mortgage) for the full term (provided the consumer could have afforded a policy with a shorter term).

So when considering a complaint about affordability after retirement, we look at whether it was reasonably foreseeable that the consumer would have difficulty maintaining the policy (and mortgage) after retirement. This is called the "continuing affordability" test.

We take into account the consumer's circumstances at the time of sale (including those expected on retirement).

When considering these complaints, some consumers - and their representatives - argue that if the adviser failed to consider "continuing affordability" at the time of sale, the consumer is automatically entitled to compensation. However, this only matters if it would have made a difference if the adviser had considered "continuing affordability".

time limits

The complaints-handling rules we follow - set by the regulator - include time limits which prevent us from considering some complaints, unless the financial business chooses not to rely on them.

Complaints about affordability after retirement are often "out of time". The period allowed for complaining about this particular issue usually ends six years after the sale of the policy.

This is because, in most cases, the consumer would have known (or should have known) at the outset that the policy and mortgage premiums ran past their retirement - and that they might have difficulty meeting the payments in retirement - the gist of their complaint.

redress

If we decide that the adviser should not have recommended an endowment with a term running into retirement - for "continuing affordability" reasons - we look to put the consumer in the position they would be in, if they had been properly advised - in other words, if they had taken out an endowment with a shorter term.

Generally this involves reconstructing the policy over a shorter term with an enhanced value.

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complaints about affordability after retirement: case studies showing our approach

In these cases the consumer was prepared to take the risks associated with their endowment policy. But we had to decide whether they were poorly advised for "continuing affordability" reasons to take out a policy that ran into their retirement.

case study 6

Mr and Mrs F complained about the sale of their policy which ran two years past their retirement. At the time of the sale, Mr and Mrs F had a number of savings and investments, Mr F was a member of his employer's final-salary pension scheme, and Mrs F had a personal pension.

Mr and Mrs F accepted that they were prepared to take the risks associated with the endowment policy. But they felt they had been poorly advised to take out an endowment that ran into their retirement.

Having considered their circumstances at the time of sale, we did not uphold Mr and Mrs F's complaint. They expected to meet the policy and mortgage payments after retirement from their pension income and they had savings to fall back on. We did not think there was any foreseeable reason for the adviser to suspect that they would not be able to maintain the policy to maturity.

Mr and Mrs F did not agree with our findings. They said that the adviser had not considered whether they could afford the policy, and so the adviser had not done his job properly - and they should be compensated for that.

While we accepted that the adviser may not have considered whether Mr and Mrs F could have afforded the policy after retirement, we did not think they would have acted differently if he had. If the adviser had considered this question, we did not believe he would have had reason to think Mr and Mrs F could not afford the policy after they retired.

case study 7

Mr and Mrs G complained about the risks associated with their endowment policy - and about the fact that its term ran past Mr G's retirement from the army. We did not uphold their complaint.

Having considered all the evidence and arguments, we took the view that Mr and Mrs G were prepared to accept the risk of a shortfall - and that they were in a position to meet the policy and mortgage payments after Mr G's retirement. Mr G expected to receive an army pension after his retirement, while Mrs G, who earned a similar amount to Mr G, would also still be working.

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