Standard Life Endowment Help - Confused!

mleonard79

Hi all,
I'm just looking for a little advice and reassurance. I'm currently helping my mum sort out her finances. We have a mortgage that was taken out 15 years ago as part interest only and part cap&repayment. The interest only part was for £25,000 and a Standard Life Endowment was set up to pay this. Its a with-profits endowment policy and has a large shortfall now. It has not been performing well for years and as soon as we get our shares which will be in the next few weeks now I'm planning on doing something about it. As the endowment was mis-sold I complained and got most of the shortfall back in compensation. I've paid this straight into the interest only part of the mortgage. So now what needs to be decided is what to do with the Standard Life policy - I have 3 choices:

1. Keep the policy (am reasonaly decided this is a non-starter but would be grateful if any of you experts could tell me if its worth more than I think)

2. Sell the endowment and put the proceeds of it plus the standard life shares into the interest only part of the mortgage

3. Sell the endowment and use the proceeds of it plus the shares to pay off a personal loan and move the mortgage fully cap&repayment


The endowmet details are as follows:

Standard life With Profits Endowment Assurance (started 2 Aug 1991, matures 2 Aug 2011)

Minimum Amount Paid at maturity £15,084.38
Surrender Value on 12 May 06 £10,694.65
Quote for selling endowment on 12 May 06 £11,104.00
Amount Paid on death £25,000
Monthly Premium £50.75
Bonuses £4,634.38
Sum Assured £10,450

Future Projections: 3.75% a year £15,500/5.5% a year £16,800.00
7.25% a year £18,300

As you can see I got a quote in May on selling the endowment which would pay £400 more than the surrender value. I only got the one quote as I was just looking for a guide since I knew I couldn't do anything until after the demutulisation. However I doubt there would be much of a change in these figures from then til now. I don't think this endowment is worth keeping but if any of you do please let me know.

Basically 've been tearing my hair out trying to work out which way will save the most money. If I sell the endowment that plus the shares would give around £13,000. So then what I need help with is deciding whether option 2 or 3 will save the most money. To pay off the personal loan would take just over £13,000 and would save around £1700 in interest over the 4 years and £330 a month in outgoings. Its trying to work out what putting £13,000 into the mortgage would save that's driving me mad!! I phoned up RBS who the mortgage is with and explained the situation and asked for some help in calculating a rough estimate (as I know interest rates can change and it can only be rough) but they said they couldn't help me at all. Apparently its no longer legal for them to give such rough estimates as a customer can come back and complain they were given the wrong figures at a later date. As its compound interest I have no idea how to work it out - anyone have a simple idea of how I can compare this?? It is a flexible choice mortgage at 5.84% and has 5 years 3 months to run. I have a strong feeling that paying off the loan would save the most but I'd just like to be able to get all the figures together so I can be sure I'm doing the right thing. Any advice at all would be greatly appreciated!! Thanks.

Michelle

mleonard79

God just noticed how huge that post is - sorry for the length!!

Jorayner

Try putting your figures into this calculator - it'll give you an idea.

http://new.egg.com/visitor/0,2388,3_54988--View_1028,00.html

If you loan rate is higher than your mortgage rate , it makes sense to pay that off first if there are no penalties.

dunstonh

1. Keep the policy (am reasonaly decided this is a non-starter but would be grateful if any of you experts could tell me if its worth more than I think)

Standard Life older conventional WP plans do have faults on their projections and are not reliable for the real position of the endowment. SL are known to project from the surrender value and not a real value on some of their plans.

I believe yours may be one of these as the 3.75% projection figure is barely anything more than the current position. The surrender value is £5000 less than the current position so any surrender is going to cost you £5000. The alternatives would need to make that up before you see any profit.

A figure in excess of £20k would not be unexpected on this policy given this situation if market conditions remain with steady growth of the next 5 years.

mleonard79

Hi Dunstonh,
Thanks for your reply. I had thought the older WP funds didn't have the best of reputations hence why I assumed selling it would be the best option. I'm a bit confused by the bit where you say that any surrender would cost me £5000 however - I'd guessed that it would probably only be £1-2K and therefore worthwhile (in that i'm obviously taking into account that we'd be saving the £50.75 a month which would be being paid in and therefore that comes to over £3000.) You say that the surrender value is £5000 less than the current position but I thought the surrender value was the current position? Very confused now. Also you say getting over £20k back from this policy would not be unexpected but would it not have to grow an astronomical amount to reach that as even growing at 7.25% a year it would only reach £18,300 according to the figures? With them saying only £15k is guaranteed at the end and even with the mortgage promise (which I wouldn't hold my breath for) I hadn't reckoned on it getting any higher than £16.5k at best at the end of term. Just checking to make sure you've got those figures right as if so I would clearly have to have a rethink. Thanks again.

Michelle

dunstonh

I had thought the older WP funds didn't have the best of reputations hence why I assumed selling it would be the best option.

Its the misquoting on projections on these older plans which is the bit which makes them look worse than they are.

I'm a bit confused by the bit where you say that any surrender would cost me £5000 however - I'd guessed that it would probably only be £1-2K and therefore worthwhile (in that i'm obviously taking into account that we'd be saving the £50.75 a month which would be being paid in and therefore that comes to over £3000.) You say that the surrender value is £5000 less than the current position but I thought the surrender value was the current position?

The current position is the sum assured plus annual bonuses. That is £15084. The surrender value is nearly £5000 less than that at £10,694. There may be some terminal bonus accrued behind the scenes which could increase that difference.

If you surrender the endowment, you will lose nearly £5000 on the value. So the alternative option has to be able to make up that £5000 over the remaining term. Seeing as you have £3045 to pay in premiums to the end of the endowment, getting nearly £5000 for that "guaranteed" and probably more, indicates that its worth keeping as you will be getting back more than you will pay for the time left.

Also you say getting over £20k back from this policy would not be unexpected but would it not have to grow an astronomical amount to reach that as even growing at 7.25% a year it would only reach £18,300 according to the figures?

As i said, Standard Life old conventional with profits plans are notorious for using the surrender value to project from and not the current position. This automatically lowers the projection values. I have seen standard life projections showing large shortfalls before maturity but come in with 10-20% surplus despite that. I am not alone and most long trading IFAs would have seen the same.

In your case, the current position is £15084, not including any terminal bonus. The 3.75% projection is £15,500. Thats only £416 higher than the guaranteed minimum which is around 0.5% a year from the current position. That suggests that the projection is using a lower value to base its projections on. As it happens, the current bonus rate for SL is 0.25/0.5% so the £15,500 is a reasonable figure to expect at this point plus any terminal bonus.

Terminal bonuses are on the rise again and that is where the greatest potential is going to be. If you ended up with a 40% terminal bonus (against sum assured) then that is a further £4180. Terminal bonuses are not guaranteed but we are seeing them reappear and 40% is within the potential of this plan.

However, even if you just look at what is guaranteed to pay out as minimum, that is nearly £5000 more than the surrender value and your remaining premiums to the end of the term are less than that so from this point to maturity, you will make money by keeping the endowment.

EdInvestor

Hi Michelle

mleonard79 wrote:

Standard life With Profits Endowment Assurance (started 2 Aug 1991, matures 2 Aug 2011)

Minimum Amount Paid at maturity £15,084.38
Surrender Value on 12 May 06 £10,694.65

Future Projections: 3.75% a year £15,500/5.5% a year £16,800.00
7.25% a year £18,300

If you cashed in the endowment and put it on deposit @4% also paying in the premiums to maturity, you should end up with £16,397.That compares with the guaranteed value of £15,084 - quite frankly the likelihood of a terminal bonus at Standard is now low.I would cash in or sell this one.

To get the best return with the money, pay off the loans with the highest interest rates first.

Ian_W

EdInvestor wrote:

If you cashed in the endowment and put it on deposit @4% also paying in the premiums to maturity, you should end up with £16,397.That compares with the guaranteed value of £15,084 - quite frankly the likelihood of a terminal bonus at Standard is now low.I would cash in or sell this one.

To get the best return with the money, pay off the loans with the highest interest rates first.

Whilst paying off the debt MAY well be the best option if the endowment is cashed in/sold I'm rather surprised by the conclussions in your first para Ed as they don't compare like with like - unless I'm missing something. The guarenteed value is likely to be increased by the majority of the £3K to be paid to maturity plus - potentially at least - some growth to those. So comparing the present value with putting the sale/surrender value in a 4% account and paying into that the remaining premiums seems dubious to me, to say the least. Perhaps I'm missing something?

DH is right about the projections. I did a work out on my policy and it seems they project 3.75% compound growth on the current value [same as the surender value on mine] then add about 90% of the remaining premiums with no allowance for those to grow at all for the remainder of the policy. Does have the potential to make things look a bit worse than they are or perhaps SL don't expect any growth to WP premiums in the future!!

EdInvestor

Ian_W wrote:

Does have the potential to make things look a bit worse than they are or perhaps SL don't expect any growth to WP premiums in the future!!

They've said as much.You're also forgetting the deductions for old-style high charges and life cover. Many endowments can no longer beat cash for these reasons plus the additional factor that the WP fund is likely to be 50% invested in low growth bonds, as is the case at Standard.

mleonard79

Hi everyone,
Thanks for all the replies, very interesting reading but I feel more confused on what to do now than ever!! Can I be a dummy and ask what terminal bonuses are? I assume its a bonus that you only get by sticking with the endowment to maturity but I don't know anything about them. Also what difference would it make if we stopped paying the premium but kept the policy - I know you can do this, what would I expect to get back in that situation? I can see that a few of you differ on whether I should keep or sell, I guess its hard to predict what the policy is going to end up at. All I truly know is guaranteed is the £15,084.38 plus whatever we get from the mortgage promise fund (something between £1,240 and £1,860) so I guess the minimum guaranteed is £16,324.38. I'm not too sure how they decide how much you get from that fund though. Initially I thought that with the way it's been performing we would be lucky to get £17K back and therefore selling was best but after Dunstonh saying we could be in for £20K plus I'm unsure now. As there doesn't seem to be a way I can work out the interest I would save on the mortgage I'm just going to try and work out which scenario works out best by calculating the total cost of each and comparing it from there. I'm doing this at the moment and will post the figures soon in the hope all of you with better financial nouse than I can check my figures and make sure I'm not missing out anything simple!! Thanks again for the help.

Michelle

dunstonh

Ed is comparing 4% on savings accounts against zero on the standard life endowment. Its hardly a fair comparison. Whilst 20k is within its potential, it wouldnt take much of a terminal bonus to bring it to that and you certainly have time enough for one to build up.

There are 3 bonuses. Reversionary (Annual), Special and Terminal (final). Ignore special bonuses as they are uncommon and tend to reflect a certain event. NU for example will probably be paying a special bonus in 2008 on all CGNU plans but its not a common event. Annual are the annual bonuses. I think you are ok on those. Then you have the terminal bonuse. This is a discretionary bonus paid on maturity of policies. Usually it builds up behind the scenes over time. SL had a policy of not disclosing the terminal bonus accrued to date to policyholders but they would to IFAs looking after that policy. I dont know if that is still the case as I only see it from the adviser side. However, you do need to know this information.

Whilst ongoing annual bonuses are likely to be low in future, the bulk of the returns are most likely to be in the terminal bonus. Terminal bonuses are not guaranteed like the annual bonus so do not place as much pressure on the solvency of the life company.