Help with parent's endowment

EdInvestor

Hi Oompa,

It would be helpful if you could post some recent projections about the likely maturity value of these endowments, if you have them. This would give us a bit of an idea about how the Winterthur WP fund might perform.

Oompa_Lumpa

Ed, I have got final projection amounts for the bigger policy - the one with a target of £25k.
They are as follows with their respective growth assunptions:

3% - 19,700
4.75% - 20,800
6.5% - 22,000

I would appreciate your thoughts on what their options are.

EdInvestor

Hi Oompa,

If they were to surrender the big one and put it on deposit also paying in the premiums @4% to maturity they should get 20,374.

So about the same as projected by the endowment - but of course this is a rsik projection, and the cash return is guaranteed.

The endowment would pay out 17,979 guaranteed.

They would no doubt get a better return by cashing in and paying off part of the mortgage at the higher interest rate,and then overpaying the rest of the amount owed by the mortgage payment + endowment premiums + a bit more - that should cover the shortfall.

That's assuming they don't need the life cover - this can be a factor with older people.

Oompa_Lumpa

Ed - thanks for your quick response.

If they did cash in the endowment does it have any tax consequences?

They are both 50, and although they don't have a bad credit record my mother will never work again due to illness and my father has just started up a small business after being out of work for a number of years.
So although they obviously wouldn't have to borrow very much if they cashed in (approx £8k) would they have any problem getting the extra amount needed to cover the shortfall?

Oompa_Lumpa

Say my parents decided not to cash in their endowment, what tax free saving options are available for them (apart from an ISA), ie like they had with their mortgage?

Or is the only way that you can save in a tax efficient way is through an ISA?

EdInvestor

There shouldn't be any tax consequences.

They would no doubt get a better return by cashing in and paying off part of the mortgage at the higher interest rate,and then overpaying the rest of the amount owed by the mortgage payment + endowment premiums + a bit more - that should cover the shortfall.

If they can also remortgage to a cheaper rate, they may not have to increase the mortgage payment.

There are three choices:

-remortgage to a new smaller repayment mortgage at lower rate and repay using both current mortgage payment and endowment premium. Extend term of mortgage if monthly payment is too high

-remortgage to new smaller I/O mortgage at cheaper rate and increase payments to include endowment premium, also overpaying where possible

-pay off a chunk of existing mortgage, and then overpay it using the endowment premiums plus any other spare money they have.Term could also be extended.

What they need to do is to sit down with a broker and work out the costs and benefits of all these options.

Oompa_Lumpa

Thanks Ed (once again).