Aviva Endowment surrender or keep

gunnag

Ive got a with profits endowment with Aviva (originally CGNU Homemaker), the policy has been running for 16 years with 9 years left to run. I pay £84 per month, the basic sum assured is £18053, current surrender value £19320, accrued bonus £6857. The endowment was supposed to cover a mortgage of £62250 but is now projected to return around £42000. The endowment does have a promise whereby Aviva will 'guarantee' a %6 return.

Given that my mortgage is now £26000, would it be worth surrendering the endowment now rather than paying in to it for another 9 years.

All info welcome

Antonio_Vivaldi

If I was in your shoes I'd be very tempted to cash in the policy and pay off most of the remaining mortage with it. You'd be saving yourself most of the capital and interest payments for the next nine years which, if you were so minded, you could save, which might add up to quite a lot over that time.

dunstonh

What is the mortgage promise value?

gunnag

The promise value (guaranteed %6 return) is £42000.

From what I can work out, if I surrender now I will save:-
- £9072 (9 years endowment premiums)
- £11700 mortgage interest @ 5% (this is the long term average)

So the surrender value £19320 + £9072 (premiums) + £11700 interest = £40092.

So by surrendering now, IM potentially around £2000 worse off than in 9 years where I should get £42000 promise value.

Am I right in my calculations?

IM leaning towards surrendering as I would like the mortgage paid off now and could reinvest the savings elsewhere.

dunstonh

The promise value (guaranteed %6 return) is £42000.

That isnt the MEP value. That the 6% projection. You are not looking at the MEP value correctly. It was capped in 2003/4 and is paid on top of maturity values that fall short to a maximum of the target amount of the MEP value whichever is lower.

The MEP is lost if you surrender.

gunnag

I had a look at the endowment docs again and the MEP is £11050, though it says this is the maximum amount.

From what I read, the MEP was calculated by taking the 1999 policy value and generating a projected value assuming 6% growth. The MEP is the difference between the target amount (£62250 ) and the projected growth at 6% from 1999.

Therefore if I hold to maturity, the possible maturity value would be £62250 - £11050 = £51200.

Are my numbers correct? If so, it may be worth holding on another 9 years

ukcarper

That’s not how it works you can ignore the £62250 all the promise means is that they will top up the final value by a max of £11050. So if the projected figure is correct (far from guaranteed) you would get that plus the promise value i.e. £53050. If final value is higher they will make it up to a maximum of £62250. The promise can make all the difference, as it is only paid on completion it’s the reason I haven’t surrendered my policy.

The only other thing is do not rely on the projected value a policy of mine that has just matured did not make the 4% projection.

Another thing is that Aviva have said that if they decide to stop paying the promise they will give 3 years notice

dunstonh

From what I read, the MEP was calculated by taking the 1999 policy value and generating a projected value assuming 6% growth. The MEP is the difference between the target amount (£62250 ) and the projected growth at 6% from 1999.

That is how the figure was "created". However, it is not dependent on 6% being achieved. It was capped at the £11050 in either 2003 or 4 (cant recall which. I think 2004).

Therefore if I hold to maturity, the possible maturity value would be £62250 - £11050 = £51200.

No.

You get future investment returns, whatever they end up being, plus £11050 on top of them as long as the £11050 does not take you over the £62250. i.e. if your maturity value is £62,000 you would get £250 under the MEP. If it was £55,000 you would get £7250 under the MEP. However if its £51200 or lower you will get £11050 added.

If you surrender now, you will kiss goodbye to £11050.

You have 9 years paying £84pm. Thats a total of £9072.

Your current value is £24910
Mid rate projection is £42,000 which is a fair estimate for Aviva
add on £11050 and you have £53050.

So your option is to surrender now and get £19320 or wait another 9 years and pay £9072 over that period to get an extra £33730

gunnag

Dunstonh thats great, thanks for clarifying :beer:

ukcarper

Why do you think that 6% is fair as they are achieving nowhere near that now

dunstonh

Why do you think that 6% is fair as they are achieving nowhere near that now

Long term avearge has been around that figure and they were over achieving that pre-recession. We have had the hit from the recession but the effects of the recovery should filter through. Not saying they will as no-one knows the future but if you look at the dot.com crash (which saw markets drop by a similar amount) the years that followed all exceeded 6%.