Endowment policy vs Stocks and Shares ISA

saveonarola

I have a 25-year with-profits endowment policy with Phoenix (formerly Scottish Provident) that matures in February 2023. It’s not one of the very worst of these policies, but it’s not good either. The premium is £75.54 a month. The basic guaranteed sum assured (including bonuses) is £17,390. The current surrender value is £11,227. (I’ve tried the second-hand market, but didn’t get any higher quotes.)

Since I’ve paid off my mortgage and I have no dependents, I don’t need the life insurance, so my question is: could the money be working harder somewhere else? According to Phoenix’s figures, if the policy grows at 3% a year, I will end up with £26,700. Given that the total of the surrender value plus the remaining premiums is £22,105, I wouldn’t do much worse putting the money in a building society, with no risk. And assuming that the endowment fund performed more or less in line with the index, wouldn’t I be better off putting that £11,227 and the remaining premiums into a stocks and shares ISA, a tracker or something like that? Or am I missing something?

Apologies if you've read this before, but I posted a similar query in the endowments forum, then decided it might make more sense here. Any comments gratefully received. I’m a first-time poster, but I’ll try to reciprocate.

Loughton_Monkey

The 'dynamics' of this sort of endowment policy are usually like this:

1. You pay your monthly premium. There is usually a 'charge' up front. Typically, this can be discovered by looking at the 'allocation rate'. The fund in which it is invested would typically have a 5% bid/offer spread and so a rate of 105% would represent nil up-front charge, whilst a 100% would be around 5%.

2. There is a 'cost' deducted for the life assurance element (basically the death benefit less the intrinsic fund value).

3. The balance is invested in a 'fund' which itself will have some inherent charge within it.

If you were to be almost at maturity date, it is often best to leave it. But you have over 10 years to go. Nobody can tell you how your particular fund might perform, nor any comparison with what another fund you chose in an ISA would produce. But personally, I would 'cut my losses' and drage the money out.

Before doing that, however, look inside the exact policy wording. There may be 'bonus unit' entitlement on something like 10th anniversary, or at maturity. This might make a small difference. And remember that if by surrendering it, your policy becomes 'non qualifying' then any 'profit' might be put down as a 'Chargeable Event'. This is probably nothing to worry about unless you are sailing close to the £10,100 Capital Gains in this tax year.

saveonarola

@Loughton Monkey

Thanks for such a detailed reply. I assume the profit that might become chargeable is anything over and above the premiums already paid in? Not much danger of that! (Seriously, I don't have any other CGT liability, so I don't think that would be an issue.)

I guess there's not that much in it either way. I don't want to allow to inertia to make the decision, but there's no over-riding reason to cash in either. Hmm.

Loughton_Monkey

Up to you to stay in or come out. I find Stocks & Shares ISA's far more simple and flexible investments personally. But if you do come out, probably not a bad idea to continue paying £75 a month (or more obviously if you feel like it) into the ISA after April. Regular investment into funds (as for unit-linked life assurance) has the advantage of "£cost averaging" which can provide marginal advantages in the longer term.