NU imposes 22% endowment surrender penalties

dunstonh

Do the people in the WP fund without these "special" promises end up paying for those with them?

The overall amount of the promise is factored in to the whole fund. So, its a drop in the ocean. They are certainly valuable for the people that get them but they are effectively being paid by all with profits policyholders whether they get them or not. In effect, its like an insurance policy being paid by all to benefit a few.

can you please explain to me how OVER 25 years the returns on these policies are so poor. Over the last 22 years I feel like we have got no benefit in the good years of the stock market and always taken the hit in the bad years When we didn't get any gain in the good years I'm sure I was told that this was because the funds were no longer invested in risky equities. But now suddenly I'm exposed to the losses from the stock market crash?

Overall, you will almost certainly have still beaten cash savings over the term. The problem is that these policies were priced in the boom/bust days with a high inflation economy. So, they were expensive compared to modern contracts which are based on a lower inflation economy. Also, the equitable life issues led to the FSA increasing the solvency requirements for life insurers and that came more or less at the same time as the tech stocks crash. That led to a massive sell off in equities in a falling market. The one thing consumers are told never to do, the insurance companies had to do. So, they suffered lossses there and missed out on much of the recovery in the years that followed as they were not as heavy in the markets. Although they did start to increase exposure over the last few years (just when it was getting near the peak!).

The reason for the MVRs is not so much to do with the stockmarket as the pro-rata drop on a diverse portfolio like a with profits fund but because the two other main areas; property and fixed interest have gone off the boil at the same time. Two weeks ago, the whole fixed interest sector suffered a 10-20% loss almost overnight. That is more alarming than the stockmarket as the stockmarket is doing what the stockmarket always does.

On the upside, the things that made the endowment turn out to be poor quality have actually made everyone financially better off. Had the economy continued in a way that suited the endowments and allowed the endowments to continue to pay big surpluses, then overall you would be financially worse off.

setmefree2

dunstonh wrote: »

Remember that the 4% projection on endowments really means around 2%. The project at 4% before charges. Not 4% net return. NU also have the mortgage promise value. I dont know if that applies to you or now and there is the special bonus of just over 3% being added on some plans this december (and the two after for those that havent matured). Again assuming you qualify for that.

2% - I could weep:o Why didn't my forecast/projection letters say a 2% return?

My NU policy does have a promise value, for what it's worth.

setmefree2

dunstonh wrote: »

Overall, you will almost certainly have still beaten cash savings over the term.

How can that be if I'm only going to get 2% return? I'm getting 5.75% on my cash ISAs?

setmefree2

dunstonh wrote: »

Also, the equitable life issues led to the FSA increasing the solvency requirements for life insurers and that came more or less at the same time as the tech stocks crash. That led to a massive sell off in equities in a falling market. The one thing consumers are told never to do, the insurance companies had to do. So, they suffered lossses there and missed out on much of the recovery in the years that followed as they were not as heavy in the markets. Although they did start to increase exposure over the last few years (just when it was getting near the peak!).

The reason for the MVRs is not so much to do with the stockmarket as the pro-rata drop on a diverse portfolio like a with profits fund but because the two other main areas; property and fixed interest have gone off the boil at the same time. Two weeks ago, the whole fixed interest sector suffered a 10-20% loss almost overnight. That is more alarming than the stockmarket as the stockmarket is doing what the stockmarket always does.

On the upside, the things that made the endowment turn out to be poor quality have actually made everyone financially better off. Had the economy continued in a way that suited the endowments and allowed the endowments to continue to pay big surpluses, then overall you would be financially worse off.

This is what I fear. I have got none of the gains from the equity markets and all of the losses:o. Speechless - what a dogs breakfast.

EdInvestor

dunstonh wrote: »

Also, the equitable life issues led to the FSA increasing the solvency requirements for life insurers and that came more or less at the same time as the tech stocks crash. That led to a massive sell off in equities in a falling market. The one thing consumers are told never to do, the insurance companies had to do.

It wasn't so much that the FSA lifted solvency requirements - rather that it required insurers to cover their guarantees properly.Formerly they had been allowed to "wing it" and this led to the Equitable disaster.

The FSA decreed that where the insurers had provided a guarantee (whether guaranteed annuity rate, guaranteed investment return, guaranteed minimum pension or guaranteed sum assured) then money to pay this had to be reserved in bonds, not in equities which were deemed risky.

This has impacted in different ways depending on the company: Where insurers had sold substantial pension policies, endowment and WP policyholders have often suffered disproportionately as money had to be transferred out of equities into bonds which would not have been moved if only the endowment guarantees (which tend to be lower) were being covered. This has lowered endowment returns, cutting payouts and TBs.

This is visible at companies which have no pension members ( eg the smaller mutuals),which are paying very significantly higher terminal bonuses than those with a higher number of pension clients. It's not surprising that Equitable itself, where the vast majority of customers had pensions, many of them with valuable GARs, is one of the worst endowment providers as far as payouts are concerned.

So, they suffered lossses there and missed out on much of the recovery in the years that followed as they were not as heavy in the (stock)markets..... (and now) the two other main areas; property and fixed interest have gone off the boil at the same time. Two weeks ago, the whole fixed interest sector suffered a 10-20% loss almost overnight.

So the bonds didn't turn out to be that much safer either.

Dog's breakfast does indeed come to mind.

The underlying lesson IMHO is that guarantees are usually not worth the papoer they are wriiten on, and when they do work out, have often cost you a lot more money than any likely loss you might have incurred by simply taking a bit of well thought out risk with, a smallish amount of your money.

Too many investoirs want to square the circle - get high returns but take no risk.It can't be done. In the simplest way, even in cash, you see this with the Icelandic banks imbroglio.

dunstonh

2% - I could weep:o Why didn't my forecast/projection letters say a 2% return?

The projections are just examples. However, they are not using net returns. They use gross returns. Also, investments dont grow in a straight line. They zig zag. You get negative periods and positive.

My NU policy does have a promise value, for what it's worth.

Its fully funded and worth every penny.

Dick_here

You don't hear any complaints from people who have died immediately and had the life cover pay out (over a thousand times more than they paid in), do you ?

setmefree2

dunstonh wrote: »

Its fully funded and worth every penny.

Hi

Unfortunately my promise seems to come with a caveat -

" it is our intention to fully offer the Promise as long as the fund that you are invested in can afford to pay. In current conditions this is likely to be the case, (May 08) if that view changes we will give you 3 years notice"

I have 3 and a half years to go until my policy matures (May 2012), so it would appear if we get to next May then the promise is good.

I suppose in the end I just think these endowments lack transparency. Of course I would never pick such a product now:rolleyes: but we made the decision to keep it for better or worse. However, I've always seen this as a reasonably liquid investment that I could cash in if I lost my job, say. This latest news puts an end to that, so I suppose I am disappointed that in fact I have quite an illiquid investment:o

dunstonh

No-one would pick the product now. Its obsolete. (although the direct offer versions still get well bought by those not seeking advice).

crazydcl

setmefree2 wrote: »

How can that be if I'm only going to get 2% return? I'm getting 5.75% on my cash ISAs?

Ah, but are you basing that return simply on what you pay in each month, or are you correcting that figure to allow for the cost of sourcing life insurance elsewhere. If I calculate the return on my Pru WP endowment based on payments only, sure, it's pretty pants, probably close to zero. But those payments are also paying for life and critical illness cover for 25 years for myself and my wife, and included a weighting for my rock climbing habit. Once that's factored in (and no, I haven't done the maths!), I suspect the return is not too horrific, although I doubt whether it's good. Also remember that savings returns have been a lot lower for the last 7 or 8 years than they are now.