Million Dollar Question: Cash in Endowment to pay off debts....?

Nickinoonee

Does anyone have an opinion on this scenario...? Me & my husband have suffered a low income year (me at home with baby / him starting a new business venture!)

We are toying with the idea of surrendering our under performing Standard Life endowment with two objectives: (a) Pay off our loans so reduce our monthly outgoings (b) Start an ISA plan to repay a lump sum off our mortgage about the time the plan would have matured (16 years time).

So POTENTIALLY we could be Debt Free (Whoo Hoo) and have a bigger lump sum in 16 years time... or am I dreaming...?

The Endowment :

With Profits 23 year plan, 16 years to go (1999-2022)
Original target amount = £60,000
What Plan might be worth = £41,600 £51,300 £63,600
What we pay monthly = £132
Total we'd have paid into plan = £36,432
Surrender value quoted from SL = £11,387

Our Debts :

2 x Loans total = £11,300


Any thoughts anyone....? Nicki

EdInvestor

What's the interest rate on your mortgage?

regularsaver1

I'm unsure what you mean by having a bigger lump sum in 16 years. Would you pay the money you are paying to loans straight onto mortgage now ?

Ian_W

Not an expert - hopefully one will be along soon - but a few thoughts:
1. You haven't said if the Endowment is "with profits" or unit linked, I assume it's the former but if it is the latter you need to post what funds are available as SL have some very good ones from what I've seen.
2. Don't forget the premium includes £60K life assurance so if you do get rid you should replace this cover [with a young family that's likely to be essential] beforehand and be aware of this cost - see Martin's insurance section of the site.
3. Some endowments give you all the bonuses attaching on or after certain anniversaries, 10yrs is quite a regular one so you need to check whether this applies to yours in which case they are probably penalising you for leaving before that date so don't if you don't have to.
4. You're getting back only marginally more than you've paid in, not surprising because of charges in the early years and the affect the stock market crash in 02 had on SL. See if you can get a price to sell it rather than surrender - if it's quite a bit better price then an investor thinks there is money to be made from it which suggests surrender might not be your best option.
5. Over 16yrs the £60K equates to over £300 pm as a level payment. I would think you need to start with at least half amount towards your ISA [+ your life ins costs] - probably more - to stand any chance. There is long enough to invest in the stock market and achieve that amount but you will need to be disciplined. You could also consider making part of your mortgage repayment and increasing this as time goes by.

I don't know if it's the right thing to do but I would be uneasy using a long term investment designed to pay off your mortgage to pay off short term debt. Sometimes needs must, but do be realistic about what you need to put in the ISA to pay it off. BoL.

Nickinoonee

regularsaver1 wrote:

I'm unsure what you mean by having a bigger lump sum in 16 years. Would you pay the money you are paying to loans straight onto mortgage now ?

Well what I was thinking is.... I would be saving £479 per month by not having the loans and the endowment so I could use whatever cash we have surplus at the end of the month to plough into an ISA.

Nickinoonee

EdInvestor wrote:

What's the interest rate on your mortgage?

It's 4.29% Fixed until November 2007.

EdInvestor

Nickinoonee wrote:

The Endowment :

Original target amount = £60,000
What Plan might be worth = £41,600 £51,300 £63,600

If you cashed in the policy and used it to pay down debts or the mortgage or put it on deposit @ a 5% net interest rate, also servicing the loan or the savings account with the monthly premium to maturity, your return would be 63,337.

This is almost as much as the top forecast, which no way will Standard Life achieve and is also more than the target amount .

Bear in mind you have free life cover in the policy and would need to adjust the return downwards if that needs to be replaced.

But it certainly looks as though the funds could be better deployed, eg by using the S/V to repay the high interest debt, and then overpaying the existing mortgage with the monthly endowment premium and debt payment combined. Watch for penalties obviously.

Nickinoonee

Thanks very much Ian W for your reply...

Re (3) it's been running since 1999 so only 7 years - poss another 3 years till I'd be entitled to any bonus.

Re (4) I'll get some quotes to sell rather than surrender to SL, thanks for that.

I agree with you, I don't usually look for short term fix vs. long term investment.... BUT I can't help wondering if I'm gonna look back in 16 yrs time and think "Aarrgh.. why did I commit myself for so long for so little return!"

regularsaver1

Nickinoonee wrote:

Well what I was thinking is.... I would be saving £479 per month by not having the loans and the endowment so I could use whatever cash we have surplus at the end of the month to plough into an ISA.

But you wouldn't have anything left after as the ISA would be used to repay mortgage as its interest only?

maninthestreet

"Total we'd have paid into plan = £36,432"

No you havent: £132/month for 7 years (policy started in 1999) = 7 X 12 X 132 = £11,088

Nickinoonee

maninthestreet wrote:

"Total we'd have paid into plan = £36,432"

No you havent: £132/month for 7 years (policy started in 1999) = 7 X 12 X 132 = £11,088

I meant what we will have paid in total into the plan if go to the full term ( 23 years ).