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

Need_More_Money_2

Thanks to dunstonh and EdInvestor for all your comments you have both been very helpful

dunstonh wrote:

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).

On the original key features document I received in 1998, it said "The plan is normally set up linked to the With Profit Fund ... but you can choose from the other 11 Investment Funds currently available and you can invest in up to 10 at any one time". It did say I can switch funds later on and that "currently the first 2 switches in each Plan year are free."
Of course, this is 8 years out of date now, but it does sound like I have access to alternative funds. Do I need to speak to FP to find out what the currently available funds are? Once I know what funds are available, is there somewhere where I can find out details about the funds to help choose the right one?

I suppose I also need to take into account the life and serious illness/disability cover that I get with the current plan. I did a very quick search on moneysupermarket.com and for £58,000 of cover the monthly premium would be about £18 (34 year old male non smoker).

EdInvestor

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.

I don't think this is an AMC is it?This is a charge for guarantees on top of the AMC. Quite common in WP funds these days. Takes a further bite of the return.:(

If you want to look at switching out of WP into other funds, you need to get FP to give you a full outline of the charges you will pay, including any charges for the endowment wrapper itself plus the AMCs of the funds you are switching into and any exit penalty applying to the switch.

Also you need to look at the fund selection to see if it's any good.

Then compare the charges you would pay if you surrendered and put the money into a new ISA with some decent quality funds ( via a discount broker preferably) and replaced the life and illness cover at today's cheap rates.

dunstonh

I don't think this is an AMC is it?This is a charge for guarantees on top of the AMC. Quite common in WP funds these days. Takes a further bite of the return.:(

Hard to say if its the AMC or an additional charge. It would be one of the questions asked, along with what bid/offer spread is being charged.

It did say I can switch funds later on and that "currently the first 2 switches in each Plan year are free."

This means per switch transaction. Say you switched 100% out of with profits and put 10% in 10 alternative funds, that would be classed as one switch.

Do I need to speak to FP to find out what the currently available funds are? Once I know what funds are available, is there somewhere where I can find out details about the funds to help choose the right one?

You can get an IFA to do it or you can DIY by asking FP for information. However, FP will not make any recommendation as to how you should split the funds. FP do have a good range of low risk funds with pretty consistent returns.

Need_More_Money_2

dunstonh wrote:

Hard to say if its the AMC or an additional charge. It would be one of the questions asked, along with what bid/offer spread is being charged.

Thanks again.

I hadn't realised it was quite so complicated!

With respect to charges it says:
"After an initial period which depends on the length of the contribution term and whether you have selected the Level or Low Start contribution basis, a fixed percentage of each contribution (after deducting the Plan charge and costs of Waiver of Benefit if included) is allocated to buy units. During the initial period, a lower percentage of each contribution is applied"

It also says that "Units are bought at the offer price which includes an initial charge of 5%. Units are cashed at the bid price. On any given day, the bid price is currently 5.1% lower than the offer price. The offer and bid prices take account of the annual management charge. The cost of life cover, and serious illness and disability benefit is met by cancelling units each month. It will vary each month dpending on your age at the time and by how much the cover exceeds the value of units". That's from an 8 year old document though.
In the Personal Illustration given to me when I purchased the plan it says:

"103.5% of each contribution (after deduction of the plan charge of £2 a month) will be allocated to buy units from month 39 onwards.
During the first 38 months the percentage will be 57%
The cost of waiver of contribution benefit is £1.41 a month and is deducted from each contribution before allocation to units"

Not sure what to make of this, especially the >100% part.

I'm wondering if it would be best to hold off doing anything until Dec 2008 when my current fixed rate mortgage deal ends. I could then get an IFA to look at remortgaging and what to do with this policy at the same time. Or is the policy such a bad one I should change it ASAP?

Edit: Also just noticed it says that IFA gets commission of £2.34 a month from month 39. They got £1150 at start of policy

dunstonh

If you were to get an IFA to review that now, the £2.34 would then be paid to the new IFA and not the old one. Whilst it wont make them rich, it helps pay for the stamp that goes off to the provider to obtain information and make the switch.

Not sure what to make of this, especially the >100% part.

That is quite a common occurance with unit linked contracts. It goes to offset the initial charge of 5%. This means each contribution will have a 1.5% initial charge. How that compares with the annual managment charges would have to be assessed and accurate projections (as in those that do take real values and charging structure into account) would need to be requested.

I wouldnt hold to 2008. Thats two more years and its a good time to be buying units currently.

Need_More_Money_2

dunstonh wrote:

I wouldnt hold to 2008. Thats two more years and its a good time to be buying units currently.

Does that give you enough information to say how the total remaining charges to be paid compare to new investment types?

It also seems unclear how much I am paying for the life and illness cover and it will vary with age. I've seen policies for which the monthly fee is fixed so it might be worth considering switching out.

I think I'll try to get an IFA to review it. My worry about this, is that if they advise cashing in the policy and taking out another type of policy - I won't know if that is because of the new commission they would earn.

dunstonh

Does that give you enough information to say how the total remaining charges to be paid compare to new investment types?

No, to do that, I would have to write to FP and do a cost analysis.

I think I'll try to get an IFA to review it. My worry about this, is that if they advise cashing in the policy and taking out another type of policy - I won't know if that is because of the new commission they would earn.

Regular contribution contracts pay very little money to IFAs. £100pm would earn the IFA £3pm in commission with no initial amount. Thats only 70p per month more than you are paying now. It would also involve a lot of paperwork and time. Do you really think commission bias would come into it for 70 pence?

EdInvestor

I'm afraid this endowment is full of the high charges of old - 5.1% initial charge, big offer spread,monthly plan charges, the lot. No wonder it's return @4% is so much lower than what you would get it in cash with no charges.

I'm wondering if it would be best to hold off doing anything until Dec 2008 when my current fixed rate mortgage deal ends. I could then get an IFA to look at remortgaging and what to do with this policy at the same time. Or is the policy such a bad one I should change it ASAP?

I would suggest you surrender the policy now and put it in a cash ISA and high interest account for the two years until your fixed deal ends, also paying in the premiums. Then go see a mortgage broker with a view to looking at the economics of using the capital to reduce the mortgage amount and the old endowment premiums to increase the mortgage premiums and overpay the I/O mortgage ( more flexible) or to use the money to remortgage to repayment for a lower amount, with the endowment premiums paying the higher mortgage payment.

If you want to keep taking risks with the mortgage ( not necessairly a bad thing) then I would still suggest you surrender, but this time open a maxi 7k stocks and shares ISA through a discount broker (so you won't pay the 5% initial charges) and choose some top class funds to invest in. You can find such top rated funds here:

https://www.citywire.co.uk/Funds/Home.aspx

Save the premiums in a high interest account, again with a plan to review the whole scenario in two years time.

Need_More_Money_2

dunstonh wrote:

Regular contribution contracts pay very little money to IFAs. £100pm would earn the IFA £3pm in commission with no initial amount. Thats only 70p per month more than you are paying now. It would also involve a lot of paperwork and time. Do you really think commission bias would come into it for 70 pence?

Thanks - hadn't realised that. I assumed it would be more as the IFA that originally sold the FP policy received more in an inital amount

EdInvestor

BTW NMH, you may like to look at "pension term assurance" for your new life cover - it now gets tax relief, so may be cheaper.I think you have to buy any critcal illness type cover separately however.