Friends Provident Endowment Policy: Keep paying into it or not?

Need_More_Money_2

I took out a with profits endowment policy (Friends Provident) together with an interest only mortgage 8 years ago. I don't think I have grounds for complaint as the documentation provided at the time did state there was a risk of shortfall (although I was told verbally that this was unlikely). The policy is performing so badly I'm not sure what I should do with it. Can anyone offer advice?
The original target value was £58,000 at the end date of May 2023. It also includes life cover for that amount. Currently it is worth £7155 and the projected values at the end are:
£33,600 at 4% growth
£40,400 at 5.5% growth
£55,300 at 8% growth.

Is it correct that these figures do not take into account any final bonus, and if so is this likely to increase the value by very much?

I have since moved house and now have a much larger mortgage which is part interest only (£58,000) and part repayment. This mortgage does not end until the year 2031, giving me 8 years after the end of the endowment policy to make up any shortfall.

I am unsure whether it is worth keeping paying into this policy. I'm aware that the charges for the policy are all in the early years so it might not be a good idea to cash in the policy early, but it is worth keeping paying further money into the policy? I currently pay £93 per month. On the recent statement it says: "From 20 Aug 2004 to 15 Feb 2005 the annual bonus rate was 1%. Since 16 Feb 2005 the rate is 0.75%". Does this mean the value of the policy is only growing at 0.75% per year? This seems extremely poor and a basic bank savings account or an ISA would be much better that this.
Can anyone clarify and suggest what is best to do with this policy?

Thanks

EdInvestor

Post some more info for a view

Guaranteed sum assured
Declared bonuses so far
Surrender value ( ring up and ask)
Maturity date

Need_More_Money_2

EdInvestor wrote:

Post some more info for a view

Guaranteed sum assured
Declared bonuses so far
Surrender value ( ring up and ask)
Maturity date

Sorry, thought I'd included all those.

Guaranteed sum assured: is that the life cover? This is £58,000. If not, I dont think anything else is guaranteed.
I don't think there are any declared bonuses so far. Nothing mentioned on statement.
Most recent statement showed cash-in value at 28 May 06 as £7155.

Maturity date is May 2023

Thanks

EdInvestor

Need_More_Money wrote:

The original target value was £58,000 at the end date of May 2023. It also includes life cover for that amount. Currently it is worth £7155 and the projected values at the end are:
£33,600 at 4% growth
£40,400 at 5.5% growth
£55,300 at 8% growth.

If you cashed in this policy and put it on deposit @4% also paying in the premiums until maturity you should end up with 40,953, which is quite a lot more than their growth projection at 4% and also more than the one at 5.5%.

Is it correct that these figures do not take into account any final bonus, and if so is this likely to increase the value by very much?=

Yes, and who knows? But terminal bonuses are no longer what they were, and the Friend Provident WP fund is not heavily invested in equities.So it isn't very likely that the TB will help much.

I would cash this one in and use the resulting cash sum and monthly premiums to reduce the mortgage.

Need_More_Money_2

EdInvestor wrote:

If you cashed in this policy and put it on deposit @4% also paying in the premiums until maturity you should end up with 40,953, which is quite a lot more than their growth projection at 4% and also more than the one at 5.5%.

do you mean put it in a basic savings account with a 4% interest rate?

If I cash it in, I can't use it immediately to reduce my mortgate as I'm on a fixed rate with penalties until 2008.

does the the annual bonus rate of 0.75% that they quote suggest it is equivalent to a bank account with only 0.75% annual interest at present? My current account does better than that, never mind a savings account!

dunstonh

does the the annual bonus rate of 0.75% that they quote suggest it is equivalent to a bank account with only 0.75% annual interest at present? My current account does better than that, never mind a savings account!

No it doesn't. The annual bonus rate is just one of three parts of the overall return. You have the guaranteed sum assured (which usually accounts for around 1/4 to 1/3rd of the target value), the annual bonus and the final (terminal) bonus. FP should exceed 4% over the long term although I wouldnt put them any higher than 6%. However, that is just an estimate based on the potential of the fund. Potential means it could be higher, clould be lower. Nothing guaranteed.

Need_More_Money_2

dunstonh wrote:

No it doesn't. The annual bonus rate is just one of three parts of the overall return. You have the guaranteed sum assured (which usually accounts for around 1/4 to 1/3rd of the target value), the annual bonus and the final (terminal) bonus. FP should exceed 4% over the long term although I wouldnt put them any higher than 6%. However, that is just an estimate based on the potential of the fund. Potential means it could be higher, clould be lower. Nothing guaranteed.

I can't see anything about a guaranteed sum assured on any of the paperwork to do with my policy. The policy is called Homebuyer Plus Plan (with profits series 4) and the only guarantee it mentions is guaranteed minimum life cover.
The most recent statement only refers to the annual bonus rate and the price of a unit. How can I assess how this investment is performing compared to putting money elsewhere?

dunstonh

It looks like yours is a unitised with profits fund rather than a conventional with profits. This is actually a good thing from a growth point of view as the performance of your investment will be more tied in to when the units are purchased on a monthly basis than a bulk annual arrangement averaging people out.

Conventional with profits plans have a guaranteed sum assured. Unitised with profits usually do not but they also often have access to unit linked funds with higher growth potential. FP have some very good low risk funds with good growth potential. If you have access to those within your endowment, that could be the way forward.

Need_More_Money_2

dunstonh wrote:

It looks like yours is a unitised with profits fund rather than a conventional with profits. This is actually a good thing from a growth point of view as the performance of your investment will be more tied in to when the units are purchased on a monthly basis than a bulk annual arrangement averaging people out.

Conventional with profits plans have a guaranteed sum assured. Unitised with profits usually do not but they also often have access to unit linked funds with higher growth potential. FP have some very good low risk funds with good growth potential. If you have access to those within your endowment, that could be the way forward.

Who would be best to advise me about switching funds within the FP endowment? Would FP do this? Would an IFA be interested in this as presumably they would not make any commission if I stay with FP?

The fund is described as a unit linked fund and they guarantee not to reduce the unit price at the end of the term. Not sure exactly what that means. Also says they set aside 0.5% a year of the underlying investment value to cover costs of guarantees - this reduces investment return by 0.5%
The unit price on 26 May 2006 was 144.4p. On 27 May 2005 it was 143.4p and on 1 June 2004 it was 142.0p. So it doesn't seem to increase very much.

On 29 May 2005 the value before deductions was £6114 - but they were applying a MVR at the time which made the value £5969.
On 28 May 2006 the value was £7155 (it seems there is no longer a MVR).
So in 12 months the value has increased by only £1041, even though I have paid in £1124.28 (12 monthly payments of £93.69). The major charges were in the first 38 months and the policy started in 1998 - so almost all of what I pay in should be being invested. Am I misunderstanding something or is this an incredibly bad deal?
( I realise some of the payment will go towards providing life cover, serious illness and disability benefit - all covered for £58000, and waiver of contribution benefit)

EdInvestor

Currently it is worth £7155 and the projected values at the end are:
£33,600 at 4% growth
£40,400 at 5.5% growth
£55,300 at 8% growth.

If you cashed in this policy and put it on deposit @4% also paying in the premiums until maturity you should end up with 40,953, which is quite a lot more than their growth projection at 4% and also more than the one at 5.5%.

The purpose of what I wrote above is to give you a comparison of what this policy would be worth if you cashed it in and earned a basic savings rate (like 4%) on it until maturity, compared with their estimated returns net of charges.

This enables you to see how much you are paying in fees and charges, extra benefits like life cover etc.As you can see you are paying a lot.If you do not need these extra benefits you would be better off by around 7k if you dumped the policy and saved the money instead if the policy performs at 4%.

I agree that the policy is unlikely to perform at more than 6% if you're lucky.So why pay a large premium for risk if the returns are going to be lower - or almost the same - as cash, which has no risk?

Unfortunately these policies were set up at a time when WP funds' earnings could up to a 20% annual return every year: paying for high charges and often unnecessary benefits wasn't really noticed because the rewars were there.Now that returns are more like 7-8%, the charges are taking a big chunk out of the policy earnings, so many of them can't even beat basic cash.

Unfortunately most of them are no longer worth keeping, though there are some exceptions.

dunstonh

Who would be best to advise me about switching funds within the FP endowment? Would FP do this? Would an IFA be interested in this as presumably they would not make any commission if I stay with FP?

FP have no advice arm anymore and will not offer any financial advice. Only IFAs can offer you advice on this.

The fund is described as a unit linked fund and they guarantee not to reduce the unit price at the end of the term. Not sure exactly what that means. Also says they set aside 0.5% a year of the underlying investment value to cover costs of guarantees - this reduces investment return by 0.5%

A 0.5% annual management charge is low (most ISAs tend to be around 1.5% to put that in perspective). This is not unusual because the bulk of the charges on endowments is taken up front. This made endowements expensive over the term but we can only look forward from now, not what has gone before. So, going forward, if that 0.5%p.a. is correct, then that is very low and good value.

I agree that the policy is unlikely to perform at more than 6% if you're lucky.So why pay a large premium for risk if the returns are going to be lower - or almost the same - as cash, which has no risk?

This is the important bit. Those low charges ongoing are only of use if the investment options are any good. If the unit linked range of funds is available to you, then switching to a selection of those could well be the best option. For example, they have funds which have averaged over 10% p.a. and whilst no guarantees exist on these, the potential long term growth is much higher than the 6% (and the 4% used by Ed to compare).

Unfortunately most of them are no longer worth keeping, though there are some exceptions.

This is a dangerous comment. Recent stats have shown that most 25 year endowments will pay out a surplus. Its the short term ones that wont. Also, there are some very very good ones out there. These tend to be the unit linked endowments which offer a good fund range. Whilst they are more expensive at the start, the ongoing costs are usually cheaper than modern alternatives (such as ISAs) and you have to look from this point onwards. To assume an endowment is bad without knowing the options available is foolish. If no alternative funds are available on this endowment, it wouldnt be that attractive. If there are a range of unit linked funds available then a switch to a spread of those could make it very attractive to keep.