Legal & general endowment

timkb

I would be grateful if someone would help me understanding my endowment.

Legal & General unit linked endowment (flexible mortgage plan)
Start date May 1993
End date May 2018
Monthly payment £49.93
Original projected end settlement £38000 but last estimate was £19600@4% £24100 @6% and £29600@8%

In May 2005 the cash in value was £7606.24, 567.8 units @ £13.40 each
In September 2006 the cash in value was £9659.61, 614.44 units @ 15.72 each. Is this good/improving?

My mortgage is now fully repayment so I could cash it in to finance some house related projects instead of borrowing the equivalent. However, I am not sure how to calculate (estimate?) whether this endowment is worth cashing in or not (eg is the projected return better than what I would pay into a 12 year loan?)

Also, if I were to keep the endowment, is the worst case scenario that the value would not increase or could it even drop in value all the way to zero (are the number of units I have already and their value guaranteed?).

Is a high or increasing stock market good for this endowment? If the stock market halved in value would my endowment halve in value?

I know this type of endowment is not re-sellable, is this because of its the high risk?

Thanks in advance, Tim

dunstonh

L&G 25 year unit linked endowments should hit target and yours certainly has the potential to do so. You may wish to review the funds as you are probably not in teh best funds available and L&G do allow free switches.

Also, if I were to keep the endowment, is the worst case scenario that the value would not increase or could it even drop in value all the way to zero (are the number of units I have already and their value guaranteed?).

There are no guarantees but a zero is unlikely. You can reduce the risk by adjusting the funds or even increase the risk/potential.

Is a high or increasing stock market good for this endowment?

In the later days yes but a crash or drop at the beginning is a good thing.

If the stock market halved in value would my endowment halve in value?

Yes. (assuming you were 100% in the stockmarket).

I know this type of endowment is not re-sellable, is this because of its the high risk?

A unit linked endowment is not high risk. It can invest in low risk funds, medium or high risk. Because it has a daily value, there is no future value built into it and no reason for anyone to buy it. If it is valued at £9659, then it is worth £9659. Nothing more, nothing less. Why would anyone pay any more for it?

payless

Original projected end settlement £38000 but last estimate was ... £29600@8%

L&G 25 year unit linked endowments should hit target and yours certainly has the potential to do so

wonder what future returns will be required to catch up then?

dunstonh

Its impossible to tell with unit linked, as you know. The last 3 years would have seen returns around 10-15% p.a. Long term average will probably settle around 7-8% but the projections after a crash arent really a good guide as you are no longer in line with long term average.

timkb

Thank you both for your comments.

For what its worth my last forecast from L&G 2 years ago they said 6% was a safe assumption and hence the projected short fall. I will have to give them a call and discuss what funds I am investing in and if I could switch (I was not aware that I could switch or even ask what I am investing in!).

I guess I am in the same boat as a lot of people in that you read all the scare stories and then possibly make a rash decision.

EdInvestor

What is the interest rate on your mortgage?

timkb

Here is was thinking

My 24 year repayment mortgage is £34703 @4.39% fixed till August 2008 a plus £42297 @4.79% fixed till January 2009. I can overpay up to £500 per month with any penalty.

This is what I was thinking (very simply)

I could take out the following loan

£10000 over 12 years = £100 per month = total cost £14000 (5.9% APR)

Assuming that my endowment will be worth £24000 ( a conservative estimate?) in 12 years, £24000 minus £14000 minus the £7200 I will pay into the endowment for the next 12 years leaves me with £2800 plus the original £10000.

or I could cash in my endowment for £9659 and overpay my mortgage about £150 per month (what I would be repaying for the loan plus the endowment).

What I save on my mortgage (I do not know how to calculate this) and by not taking out a loan be more than what I could earn on my endowment?

EdInvestor

timkb wrote:

Maturity projections
£19600@4%
£24100 @6% and
£29600@8%

Using a midpoint mortgage rate of 4.6% and assuming you obtain that average interest rate for the duration of the loans, then if you surrendered the policy now and used the money to overpay the mortgage, also increasing the monthly payment by the amount of the endowment premium, the total return you would get at the end is 26,133. This is a guaranteed return.

The endowment would need to perform at 7% to equal that.It may well do this, but most of these older products have high charges which reduce returns, so nobody's expecting more.

So the question is,as with so many endowments, why take a risk to obtain much the same return you would get by not taking the risk?

Better either to proceed as above, or , if you want to keep taking a risk,take the money and invest it in something that is likely to produce a quality performance, ie not a generic managed fund at a life assurance company.

timkb

Thanks Edinvestor for the reply

your are right in pointing out the issue of risk, I am not a risk taker (hence the fixed rate mortgage which has cost me but given me piece of mind)

I contacted L&G for a latest surrender value and it was £10248, I also asked what my endowment was invested in and he said it "was a managed fund" which was not very helpful but I think it was a typical getting the right person at the call centre issue.

Tim

rossbenn

timkb wrote:

Thanks Edinvestor for the reply

your are right in pointing out the issue of risk, I am not a risk taker (hence the fixed rate mortgage which has cost me but given me piece of mind)

I contacted L&G for a latest surrender value and it was £10248, I also asked what my endowment was invested in and he said it "was a managed fund" which was not very helpful but I think it was a typical getting the right person at the call centre issue.

Tim

The managed fund is made up of a bundle of funds. Equities ( stock market )both home and abroad, property funds, cash deposits and so on.
If you are not a risk taker you could consider switching your pot into the cash fund. Not very sexy but you know what you have with very little risk. And dont forget if you are going to cash in you will be loosing valuable life cover which you will have to replace.

dunstonh

Its not about not taking risks. Its about taking appropriate risks. Everyday we face risks but we dont consider them risks as we become comfortable with them. Investing in medium risk funds on a regular premium isnt that risky at all. The fund is pretty poor quality and I wouldnt have it but there are other funds available and some of those are good enough and a decent spread gives better potential over the long run. That said, the L&G managed fund over longer term periods has managed to perform enough to provide a surplus. No guarantees on these things but you are not in a bad position.

Endowments are often cheaper than repayment mortgages and what you could do is look at the difference in your case and put aside the difference each month to help close that "potential" gap.