Should I cash in my endowment?

saveonarola · 14 February 2011 at 10:52AM

I posted this query yesterday, but received no replies. Sorry for re-posting, but I just thought I'd give it another go, hoping someone else might see it. I'd be very grateful for any comments. I'm new to the site but I will try to reciprocate. Thanks.

I have a 25-year with-profits endowment policy with Phoenix (formerly Scottish Provident) that matures in February 2023. The premium is £75.54 a month. The basic guaranteed sum assured is £15,896 and previous bonuses total £1,494.22, giving total policy benefits of £17,390.22. As at December 2010, the projected final values at 3%, 4.75% and 6.5% growth were £26,700, £31,900 and £38,100 respectively (against a target of £45,000). ‘Paid-up’, the basic guaranteed sum assured drops to £7,256, with the bonuses of £1,494.22 giving total policy benefits of £8,750.22; projected final values at 3%, 4.75% and 6.5% growth are £12,200, £14,500 and £17,400 respectively. The plan is currently invested in equities (49%), gilts (16%), other fixed interest stocks including corporate bonds (25%) and cash (10%). It’s been years since I had an annual bonus, presumably because maturing policies are being prioritised.

The current surrender value of the policy is £11,227, which includes a final bonus amount of £2,503. (In 2010 the terminal bonus for policies taken out in 1998 was 29%.) I have tried the APMM, but I received no offers for the policy from their members.

I am 39 years old and a basic-rate taxpayer. I have paid off my mortgage and I have no dependents, so I don’t need the term life insurance, although I do attach some value to the fact that others would benefit if I die unexpectedly. I have other cash and equity investments, as well as an adequate company pension arrangement, so I don’t need the cash for anything else (I don’t earn much, but I live a simple life!). I’m just wondering whether the money could be working harder somewhere else, for a comparable level of risk. Is there any argument for making the policy ‘paid-up’? And am I right in thinking that a paid-up policy becomes liable for income tax or CGT on maturity and, if so, is this a major factor?

Sorry for so much detail, but I didn’t want to miss anything important.

Meeper · 14 February 2011 at 2:29PM

Whilst an approximation of the risk profile of this endowment can be surmised by the asset mix contained within it, the fact that it is a "With-Profits" plan changes the risk profile of it entirely as there is no danger of loss to your capital. You may not get annual bonuses and so on, but the are not subject to lose your cash as you would be if it were a policy which depended on the performance of the markets.

So really, can you get a better return, yes. Can you get a better return without risk to capital - probably not.

This is all my opinion, obviously, as tehre are potentially some other pieces of information to factor into the decision-making process.

It sounds as if you are aware about the details of the policy and you have a good grasp of the pros and cons. What is *your* thought on the matter? What is your initial thinking on how to proceed?

M

kingstreet · 14 February 2011 at 3:13PM

As to your query concerning the qualifying status of a paid-up policy, I'm having to drag my brain for my ACII training back in the mid-80s.

It may be a good idea to have a look at the HMRC pages concerning qualifying policies and their options around here;-

http://www.hmrc.gov.uk/manuals/iptm/IPTM3310.htm

and

http://www.hmrc.gov.uk/manuals/iptm/IPTM8175.htm

kingstreet · 14 February 2011 at 3:19PM

More here;-

http://www.hmrc.gov.uk/helpsheets/hs320.pdf

Page 6

A gain may also arise if you, or a previous owner:
• stopped paying premiums so that the policy became ‘paid-up’ less than
10 years from the date that it was taken out, and
• at any time later, you have received money in connection with the policy, for example, when it matured, paid out on death, was surrendered or where the whole or any part of it was sold.

saveonarola · 20 February 2011 at 1:50PM

@Meeper
@kingstreet

Thanks very much for your replies. I've just come back to this, having been a bit preoccupied with other things.

@Meeper

Very good point about the risk to capital. I was losing sight of that. Although the guaranteed minimum sum assured seems disappointing when compared with the premiums paid over 25 years (especially if, like me, you no longer need the life insurance element of the endowment), it still represents a way to benefit if the markets perform well without risking losing all of the capital.

For me, it’s a tough decision, which is why I decided to post here. In another investment, as you say, I could probably get a better return, but I could also do much worse (and because of the ISA limits, I would not be able to keep all of the tax protection in the first two years). In cash, the money would be safe, but with inflation the way it is, that’s a pretty unattractive option.

Basically, my heart tells me to put an end to this endless, underwhelming commitment, but my head tells me not to make this sort of decision with my heart! I guess I'm in it for the long haul...

@kingstreet

[FONT=&quot]Thanks for that HMRC link. Very helpful.
[/FONT]

Gorgeous_George · 20 February 2011 at 2:01PM

No risk to capital? :eek:

I should hope not in a 25 year policy.

Certainly no risk to the commission earned by the leeches.

Endowments are so last century.

GG

glitter123 · 20 February 2011 at 6:04PM

Our 25 year Phoenix endowment policy matured this month.

Aside from the fact that we've had problems receiving the money (we still don't actually have it although the policy matured on the 11th!) , we're not impressed with the amount we got. We were paying £30 pm, so considerably less than you, with a basic sum assured of £6K. It was supposed to repay a £18K mortgage. Over the life of the policy (which was a low start policy with reduced premiums in the first 5 years) we have paid a total of £8527.

At the end 2005 I obtained a surrender value which was £10.500 and since then we have paid just under a further £2K in premiums and our pay out (when we finally get it) will be in the region of £15K. The terminal bonus was just over £3K

As you say, annual bonuses ceased some years ago. My experience may help you to make a decision.

saveonarola · 21 February 2011 at 11:12AM

@glitter123

Thanks for that. Always interesting to hear other people's experiences, although my understanding is that you can't really compare endowments over different periods. I don't know your circumstances, but given the woeful record of with-profits endowments, I'm not sure why you're disappointed. Assuming you get the 15K, your policy will have yielded 83% of the target amount. To achieve that, my policy would have to grow at around 7% every year for the next 12 years! If I were you, I'd be breathing a massive sigh of relief - although not until the cheque was in my hands, of course!

glitter123 · 21 February 2011 at 11:26AM

saveonarola, I think we have the early years to thank for the final amount. Personally I think any sum under the amount it was supposed to repay on the mortgage is disappointing.

Just a word of warning. Phoenix want the original policy - we have never had it because it was assigned to a mortgage from Day 1. We've no idea who lost it along the way - one of three suspects who all say "not us". If you don't have the policy already I would recommend trying to get it now.

dunstonh · 21 February 2011 at 11:30AM

Personally I think any sum under the amount it was supposed to repay on the mortgage is disappointing.

Whilst disappointing it is understandable and actually the causes of the shortfall have made us far better off overall. I would rather have a shortfall in endowment than a surplus when you consider the alternatives that would have to have stayed in place for a surplus to be achieved.

Meeper · 21 February 2011 at 11:40AM

and because of the ISA limits, I would not be able to keep all of the tax protection in the first two years

Just to pick up on this point, although slightly off-topic.

If you wanted to invest in Stocks & Shares ISAs, you can obviously go up to the annual allowance limits on those, which is £10,200 at the moment. This investment can be done with a risk-profiled tolerance depending on your attitude to risk, with more of a weighting towards cash and fixed-interest securities for the lower-risk individuals and equities for higher risk. If you wanted to invest more than the limit, don't be put off. If, for example, you wanted to invest £20,000 you could do £10,200 in the ISA account and hold the remaining £9,800 in a collective investment account invested in identical holdings with the same company. On 5th April you could then transfer the funds out of the collective investment account into the ISA wrapper and obtain its tax efficiency. There is Capital Gains Tax to pay on the gains made within the collective investment account but you have an annual allowance fot this and there is realistically no way you would exceed the annual allowance for gains on £9,800 over a 12-month maximum period. You would need to make a gain of around 90% over the year to suffer any CGT. If you have made gains in other areas, of course, you should be wary as you may have used up your annual allowance, however this is a simple way of being able to invest more than the ISA allowance on a potentially tax-efficient basis.

If you are looking to invest only in Cash-ISA products, then similar can apply but the limits are different. So, you can invest £5,100 per annum into a cash ISA and place the remainder into regular savings accounts - perhaps a notice or fixed term account that allows you to withdraw your funds on 5th April. Place as much as possible in the cash ISA then top this up once a year from the savings account. It will obviously take you a couple of years to get your full amount under the ISA wrapper, and you should bear in mind that savings accounts are not like an investment account in so much as you pay tax on the interest received on the savings at your normal tax rate. You would therefore be credited interest which should then be declared to HMRC annually to pay tax upon. Some accounts will pay the tax at source on the interest on your behalf.

So, in summary, there are ways of investing funds into a Stocks & Shares ISA (with the risks that come with that) on an "effective" tax-free basis and there are ways of investing into a Cash ISA which allows you to mitigate as much of the tax as possible. Just needs a little planning and careful thought.

Should I cash in my endowment?

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