with profits or unit linked?

Elizabeth1969

What difference does it make if the endowment is either with profits or unit linked?

dunstonh

unit linked offers greater potential for growth generally and usually allows you to invest in a range of funds covering a range of different areas. The performance is linked to the underlying assets. You do not have the financial solvency issues with unit linked plans so performance should be better over the long term.

Whilst performance should be better, there will be pockets of time when values go down. Such as happened in 2001/2 with the stockmarket crash. Whilst most inexperienced investors see this as a bad thing, for an endowment with 7-10 years to go or more, it is actually a very good thing to happen. You get to buy those units every month much cheaper. This is reflected in the 3 years since the crash (nearly 4 now) where returns have been closer to 15% p.a. You need to keep that in mind when you have projections showing what you may get back at 4% a year and how short it will be. Just because a projection shows 4%, it doesnt mean you are going to get 4%.

With profits comes in a couple of different flavours. Unitised with profits and conventional with profits. Unitised tried to modernise with profits but it came a bit too late. It brought it closer to unit linked in the way it worked but offered smoothing on the fund. Conventional with profits has a guaranteed sum assured. Often around 1/4 or 1/3 of the target amount/life cover. That is the guaranteed minimum value that is added on day 1 provided you pay your premiums to the end. On top of this you get 3 types of bonuses. Annual (reversionary), Terminal (final) and special. Ignore the last one as it doesnt happen often. Although we could see Norwich Union utilising it in 2008 with a number of their plans. Annual bonuses are paid annually and are generally around 0-5% currently. Terminal bonuse is added on maturity. Some providers will not tell you what terminal bonus you have. Others hide it away. Many do not include it on their mortgage projections which can really distort the likely returns. Although projections also have other flaws as well making them very unreliable sometimes. The bulk of the maturity value will come from the guaranteed sum assured and the terminal bonus.

A_Nice_Englishman

Thanks for a good explanation, dunstonh.

I can't really see much difference between with-profits and a unit-linked managed fund. With terminal bonus such a large proportion of the maturity value the guaranteed bit seems to be almost worthless. The company just give you what they feel like / can afford.

If you surrender there may be a market value adjuster so even the 'guaranteed' part isn't.

Is my perception correct?

EdInvestor

In the old days, the investment profiles of WP and U/L endowments were very similar - usually about 75% in the stockmarket,10% in property, the rest (ie not much) in "safe" bonds and cash. WP policies were deemed lower risk than u/l because of their guarantees.

This high risk profile is a major reason why endowments are underperforming: high charges is another.A third reason is that the FSA has required the insurers to stop investing WP policies in such high risk assets, but to "match" their guarantees with safer bonds and cash, so there's no chance there'll be a problem paying them, as at Equitable Life.

The result is that most WP endowments are now invested 50% or less in the stockmarket.Some have no shares at all.Thus, altough safer, their returns will be much lower, hence the shortfalls.

This is why in most cases you will be better to junk these policies and find something better. They no longer do what was originally said on the tin.

A_Nice_Englishman

Thanks Edinvestor.

I have an endowment, 50% Managed Fund and 50% unitised with profits. It was to support a mortgage which is now paid off and has about 10 years to run. I don't know whether to surrender, make it paid up or carry on until maturity. If only I could foretell the future!

dunstonh

"managed" funds as in Balanced Managed fund or the one you have are not great investments. They try to be a jack of all trades and usually end up being a master of none. That said, it is very rare for that to be the only fund available and some of the alternatives could be great funds.

The fact you are unitised with profits and managed suggests that you could switch 100% of the fund into the alternative funds and invest with much better potential.

You shouldnt assume that just because it is an endowment it is bad or expensive. It may be expensive compared to modern plans but with the bulk of the charges front loaded, and therefore paid and gone, the charges ongoing from this point could be very low. If some good funds are available and the charges are low, it could make very good sense to stay.