Trying to get a grip on things

path29

Hi

Please excuse my ignorance here but i've got a few questions and i've been given conflicting advice.

My wife and i took out an endowment policy with Scottish Amicable when we started our mortgage six and half years ago. At the time we took out a fixed rate interest only mortgage for five years with the yorkshire building society. When that term ended we decided to change from an interest only mortgage to a capital repayment mortgage based on the fact that endowments were (and still are) preforming badly.
Essentially, we now don't need our endownment policy to pay for our house anymore as it will be paid off with the capital repayment, but when we switched to the repayment mortgage we kept the endowment policy on as a savings fund, but these days I could think of better things to spend the money on. It's costing us about £116 a month, and I've contacted Scot Am to find out it's value where they've told me it's currently worth just over £5,000.

Now, some people have told me that it would be wise to stick with this policy, and other have told me to cash it in if i dont need it. The way I see it at the moment is that I don't need it, and that by cashing it in I will get 5 grand and save myself £116 a month.

Am I wrong about all of this? Should I keep this policy on?

dunstonh

based on the fact that endowments were (and still are) preforming badly.

No they are not. This is the biggest failure of the endowment issue. Some are doing really bad. Others are doing really well. The assumption that they are all bad has led to a number of very good ones being surrendered when there was no need to.

Am I wrong about all of this? Should I keep this policy on?

There is no right or wrong answer. It depends on the policy itself, the cost of replacement life cover and the investment funds used.

I am going to assume you are invested in the with profits fund but you should check to confirm this. Prudential are one of the better, if not the best, with profits funds providers out there. They certainly do have the potential to hit target and still potentially give out a surplus on maturity.

How much is it going to cost on the replacement life cover? Can you get replacement life cover?

Endowments are front loaded with charges. Although cheaper means of savings do exist today, the fact you have paid most, if not all of the charges already means that it may now be cheaper keeping with it as a savings plan.

There are a number of things that need to take place before any decision should be made on whether an endowment should be kept or not. I am guessing that none of these things have been done when others have told you should keep or dump it.

In addition to things above you need to know:
1 - what is current value and surrender value?
2 - what is target growth rate on plan?
3 - what funds are used and what alternative funds are available?
4 - what is the ongoing charging structure?
5 - if a surrender penalty exists, is there a point in the future when they will not be one?

You need to remember that you started your endowment just before the stockmarket crash. If its a unitised with profits or unit linked you would have benefited massively from this stockmarket crash as you got to buy the units really cheap, and still are. However, 6.5 years is not long enough to see that benefit very much yet

EdInvestor

Hello path

If you were to take the 5k surrender value and put in on deposit @4% also paying in the premiums for 19 years until maturity, you should end up with just under 50k.

Do you have a maturity projection for the policy assuming a 4% return?

You may like to compare the two.

Bear in mind the policy's returns will be reduced a bit for the life cover and if you need to replace this, you should deduct that cost from the 50k.

But if the policy projection is not showing a return considerably above 50k then it might not seem worth keeping, as you normally expect to get a premium over cash for taking stockmarket risk.

dunstonh

But if the policy projection is not showing a return considerably above 50k then it might not seem worth keeping

4% with Prudential would be erring towards the lower end of the Pru's potential. 6% is certainly potentially achievable by the Pru. Especially if its in the unitised with profits fund rather than the legacy conventional with profits fund.

EdInvestor

It may be so that 6% growth is achievable with the Pru, but for a stockmarket-related investment, better choices are available these days than endowments - even the best of them.

Do you think 6% is an adequate return above risk-free savings interest rates generally available these days? I don't.This surrender value is small enough to be put into a tax free ISA over 2 years, so he should get more than a 4% return at no risk.

dunstonh

Do you think 6% is an adequate return above risk-free savings interest rates generally available these days? I don't.This surrender value is small enough to be put into a tax free ISA over 2 years, so he should get more than a 4% return at no risk.

First thing to consider when answering that is, what charges, if any, are still remaining? If the policy has finished it's charges then its going to be cheap from this point forward. It may be expensive over the term but whats gone before cannot be changed now. We can only look forward.

Then we have to look at the allocation rate. If it gets a 102.5% allocation from year 10 (as an example) then that could really alter the answer.

Then we have to look at the fund used and available funds. If its a unitised with profits fund then there is a greater element of capital security involved as the unit price cannot go down. Only the terminal bonus can fluctuate and that cannot go below zero. There may also be funds available which have greater potential, and when coupled with the two things mentioned above, it may make the plan quite attractive (from this point on). Especially to a higher rate tax payer.

So, whereas you may answer as No. I prefer not to answer as we know nothing about this policy and what options are available.

path29

Hi Everyone

Thanks for the advice on this one. It's a puzzler and I will look into the finer details of it and get back to you.