Befuddled by endowment advice - help!

Costy

My pensions adviser came to our place of work yesterday. After going through my details making sure everything was the same, she then asked me about my mortgage. We have a 10 year fixed rate mortgage at 4.89% due to finish in 7 years exactly. We owe £66,000, of which £33,082.72 is on interest only, to be covered by an Abbey Life endowment policy. This policy was originally taken out by my husband when he was single, and had a target amount of £50,000. We did get compensation for misselling, but probably stupidly, spent the £9,000 on home improvements. The endowment matures in December 2014 and is currently worth £27296.04, although I don't know what the surrender value is.

The pensions adviser thinks we should get rid of the endowment, as it's not performing well, pay the lump sum in, and convert the shortfall to repayment. We overpay by £125 a month already. I'm a little confused by her advise, why would we want to cash in an endowment which although is not going to achieve anywhere near the original target, is not far off what we need it to cover.

Ideas and advice needed please?

magpiecottage

I cannot give a definitive answer without knowing the full details of your case.

However, the comparison you need to make is:

A) What will the maturity value of the policy be (which you can only make an educated guess at)

against

How much will your mortgage reduce by between now and when the endowment would have matured if you surrender it now, reduce the mortgage, and increase your payments to the lender each month by the amount of the endowment premium (less the cost of replacement life cover).

As well as the endowment maturity value, you will have to make an assumption about future interest rates too.

I can do some fairly complex calculations but is a case of deciding which way to jump. The default is to stay as you are.

kingstreet

This is a unit-linked endowment, so there's no bonuses or special arrangements like there were with some of the with-profit ones. What you will get back will simply reflect the growth (or otherwise) in the assets in which your fund is invested. They can fall as well as rise.

The IFA is suggesting you think about how much you will pay in mortgage interest and premiums on that £27k until December 2014. If you took the money now and used it to pay down the mortgage, you could then use all the money you would have paid for overpayments to try to repay the balance by December 2014.

Only you can decide if it is worth putting more money into Abbey Life. What happens if in December 2014 the plan is worth less than it is now? How would you feel? Is the thought of it going down worse than the pleasure in the thought of it going up?

You are going to have to be careful with the lump sum either way. You'll probably be charged a penalty to reduce the mortgage, either now, or in 2014, if you're in a ten year fix.

dunstonh

We did get compensation for misselling, but probably stupidly, spent the £9,000 on home improvements.

Based on your current figures, spending that £9000 has cost you £22,704.

The pensions adviser thinks we should get rid of the endowment, as it's not performing well, pay the lump sum in, and convert the shortfall to repayment.

Possibly correct. However, Abbey Life are unit linked and performance has been poor due to the stockmarket crash a few years ago. It would have bounced back up more recently during the recovery. So, the reason isnt poor performance but just short term issues. Repayment mortgage gives you certainty. Endowment mortgage doesnt. However, you have covered most of the difference.

Normally in this situation, an IFA would do a cost comparison between converting and staying put. An FA though shouldnt be recommending it as they are not allowed to talk about products from other providers, apart from generically.

Assuming yours is an IFA and not an FA, what has the cost comparison come out at? - if you don't have one then you cannot decide and the adviser should not be making any recommendation without the research.

Costy

Thanks. There is no charge for a lump sum payment, only an early redemption fee. How much less than the current value of the policy is the surrender value likely to be?

kingstreet

Costy wrote: »

Thanks. There is no charge for a lump sum payment, only an early redemption fee. How much less than the current value of the policy is the surrender value likely to be?

Check your mortgage terms. An early redemption fee is a penalty for paying part of your mortgage back within the fixed rate period.

Whatever we suggest would be pure speculation. Why not ask Abbey Life for a surrender value so you can be absolutely sure?