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

dunstonh

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.

No its not.

An ISA on standard commission terms would have around 5% bid/offer spread. The endowment has 103.5% allocation meaning 3.5% of that 5% is wiped out.

Also, cash ISAs do have charges. To assume any savings account is done out of love is foolish. You dont see the charges, you get a rate of return declared without knowing what they are making. This is known as implicit charging. Investments like the FP endowment uses explicit charges. In theory, a cash ISA could be a lot more expensive than this endowment (i.e. cash ISA provider is making 10% on returns, keeping 5% for themselves and giving you 5%).

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.

I do not. I suggest you get the endowment reviewed correctly before making any decision.

Whilst Ed looks at 4%, if the FP property fund is available, for example, that has grown by 9.5% a year over the last 10 years and not had a negative period in that time. Long term average is expected to be around 8% p.a. (although they have been saying that for years now).

If the initial charge is 1.5% and the annual management charge 0.5%, then that is low in charges and lower than many comparable funds from a discount broker.

Need_More_Money_2

I think I need someone to look at this in more detail before I decide which option is best. One thing I've looked at is the effect of cashing in the policy, using the value to reduce my mortgage and adding the monthly payments to my regular mortgage repayments. This assumes I can do this without charges! Apparently I'm allowed to pay off 10% of the mortgage value without penalties. So the £7100 lump sum payment would be ok, but I'd need to check if I can change the interest only part to repayment without any extra charges.
If my calculations are right, this would easly pay off the interest only part. Interest only part of mortgage is £58,000. Current interest rate is 4.69% fixed rate. I've Assumed same interest rate for rest of mortgage duration (unlikely I know but makes calculation easier) - till end of 2031. Even taking off £20 per month to cover a replacemnt life/illness policy, I still work out that it would pay off the interest only part a year early. I guess the risk with this option is that it will cost more if interest rates rise.