Should I surrender my Prudential endowment?

billandkez

I have a with profits Prudential endowment which was originally taken out with Scottish Amicable for 25 years and its maturity date is August 2013
It was taken out against a £60000 mortgage and the monthly premium is £75.00

I have just had a Plan update through the post and projected maturity figures are quite shocking. Year on year the figures have been improving and in October 2008 the figures were as follows
Projected final amount
4% each year £50700
6% each year £55300
8% each year £60300

The figures now are as follows
Projected final amount
4% each year £42800
6% each year £46100
8% each year £49700

I have called them for a surrender value and it is £33100. They said that this included a terminal bonus of around £6500
I am only currently paying 2.29% interest on my mortgage as it is a discounted tracker but the discounted part finishes in September this year so I will be looking to take out another mortgage for the remaining 4 years. If I get a new mortgage at around 5.0 % the monthly payments will be about £250 per month plus the £75 for the endowment so over 4 years I will be paying back about £16000 and then whatever the shortfall is on the endowment, which now looks like it is going to be a lot
The other option is to surrender the endowment and pay off my mortgage by adding the shortfall of £27000 from ISA savings.

Any advice would be appreciated

zzzLazyDaisy

This is just my personal take on it, qand otherws will be along soon with different views, I'm sure.

If I were in your position, and could afford to, I would pay off the mortgage.

Reason - interest rates will start to rise, and your expenses will get progressively higher. AND you are looking at having to find the money to cover the shortfall, presumably from your ISA savings?

Alternatively, cash in the endowment, use the lump sum and maybe some of your savings to reduce the mortage significantly, change to a repayment mortgage and pay off the balance as soon as possible by making over payments.

Mortgage is a costly debt, which for many people is inavoidable, but if you can be mortgage free, it frees you to make decisions in your life that you couldn't make before.

I am biased, I put all my savings into paying off my house in 2004, and have never looked back.

Good luck

picardygirl

zzzLazyDaisy wrote: »

This is just my personal take on it, qand otherws will be along soon with different views, I'm sure.

If I were in your position, and could afford to, I would pay off the mortgage.

Reason - interest rates will start to rise, and your expenses will get progressively higher. AND you are looking at having to find the money to cover the shortfall, presumably from your ISA savings?

Alternatively, cash in the endowment, use the lump sum and maybe some of your savings to reduce the mortage significantly, change to a repayment mortgage and pay off the balance as soon as possible by making over payments.

I agree with this too, but thats also my personal opinion, we've just "cashed in" our long term endowment too, paid a chunk of our mortgage which in turn has reduced our required monthly payment, but are still keeping the payment higher to reduce the amount quicker, we are paying the required amount plus the amount we were paying into the endowment each month plus a few more pounds.

Its a hard decision to make though, are you doing right or wrong .... i dont know the correct answer to that, but i felt like we done the right thing.

michaelwr

Hello,
I too have a Scotam endownment and asked for valuations to find they had dropped in the last year. I said I thought bonuses once added were secure but they were saying yes but the terminal bonuses they were adding in were now lower. I never thought valuations should include terminal bonuses but just goes to show how easily these could be easily missold.

Anyway I too am thinking of cashing in, why make a few % a year when you can reduce the mortgage and save 5-6% of you hard earned taxed money.

For selling I wouldn't go direct to Pru but would use a broker instead, I've read brokers can offer better values. The web site below reckons 10-15% more.
www apmm org uk

dunstonh

I never thought valuations should include terminal bonuses but just goes to show how easily these could be easily missold.

Historically, terminal bonuses never used to be told during the interim years. Its only in more recent years they have started supplying that sort of data and its why you see them fluctuate more. Nothing to do with it being mis-sold.

EdInvestor

billandkez wrote: »

The figures now are as follows
Projected final amount
4% each year £42800
6% each year £46100
8% each year £49700

If you were to surrender the endowment now and use the lump sum to reduce a mortgage with a rate of 5%, also increasing the mortgage payment by the amount of the endowment premium to maturity then your guaranteed return would be 44,217.

So the premium you expect to get for taking the risk of using the endowment does appear mainly to have gone. Bear in mind that the existing terminal bonus is likely to fall in coming months, which would further reduce the projections.

It is worth seeing what the brokers would offer at https://www.apmm.org

If there is a good offer, that can sometimes be an indicator that the endowment will do better than expected, and is thus worth holding.

dunstonh

I disagree with Ed. Terminal bonuses on Pru and Aviva plans have been increasing recently. They will trend with the markets and that is always an unknown but you should work on the assumption that they will be lower.

Also, you need to consider the cost of replacement life assurance in the calculations. Pru is easily capable of hitting that 8% figure. They were exceeding that following the tech stocks crash and whilst we are unlikely to see as quick a recovery as we did after that, the trend for the long term is still likely to be upward. You need a cystal ball to be sure but you have to work on guess work and make judgement call.

If those figures were not Pru but another company then I would be inclined to get shot. However, with Pru, its a different matter.

EdInvestor

In the past the Pru did stand out as a good performer among WP funds - indeed this endowment was still (just) projected potentially to hit the target in 2008, which is more than you can say for any other brand, I'd have thought.

But the picture is now very different and the OP only has four years to go.The Pru may be able to recover from the setback in time, but there is a big risk it won't be able to.

The fact is that the OP is no longer being compensated for taking a risk: he will get much the same return via the guaranteed cash route of reducing his mortgage.

figgles

I've got 2 Pru WP endowments due to mature in 2016, for one of them the 2008 figures show a projected surplus of over 2K at 6%, the 2009 figure was £100 (to pay off £17K).

Saying that, my (probably optimistic) view is that things can't get much worse and should improve in the next 7 years which will hopefully mean investments made at this time will make up for the last 12-18 months of bad performance.

Fingers crossed anyway!

billandkez

dunstonh wrote: »

Also, you need to consider the cost of replacement life assurance in the calculations.


If I cashed in and paid off the balance I would not need any replacement Life assurance

I suppose the gamble is do I cash in and pay out £27000 now to clear my mortgage or let it run for 4 more years, paying about roughly another £16000 on mortgage interest and endowment premiums and then the million dollar question is what would the shortfall be that I would then have to make up.

Was just a bit concerned that if the projected value can fall by about £9000 in 8 months what is to say it won't continue to fall heavily

figgles

billandkez wrote: »

Was just a bit concerned that if the projected value can fall by about £9000 in 8 months what is to say it won't continue to fall heavily

Nothing, but then what's to say that in 12 months it wont have recovered, and in 4 years still pay off and give a surplus?