Keep or surrender endowment

prodda

I have an Aviva with profits endowment that's due to mature in July 2022. The current premium is £60.47 per month.

It was set up to pay off a £25k mortgage (which I've now paid off anyway) but is projected to make a shortfall. The current value is £12,351 (£9350 sum assured plus £2600 previous bonus & £400 new bonus). The projected shortfall is 4% = £15,600, 6% = £18,500 and 8% = £21,900 - the MEP is £3,600. Just found out from Aviva that the surrender value is £7600.

I am thinking about whether to cash it in but the projected shortfall (assuming 4%) plus MEP plus a possible maturity bonus seems to outweigh surrendering it. If I did surrender it I don't have the funds earmarked for anything else. Any thoughts gratefully received.

dunstonh

The current value is £12,351 <snip>
the surrender value is £7600.

So first thing that happens if you surrender is that you lose £4751. You also lose the MEP of £3600. So, total loss on surrender compared to keep and assuming nil future return is £8351.

Then add in the premiums still to pay which is £7900. So, even if a penny isnt paid on it again, you are still up by keeping it rather than surrendering it but not by an amount that makes a significant difference.

Then look at what you expect it to return. We dont know but long term, the 6% would be a reasonable figure to go by (remember that on projections that the 6% is the underlying fund growth not your personal growth rate. So, when you use the 4% figure you are effectively saying you expect to return around 2.5% a year). So, thats £18,500 plus £3600 making an estimated maturity of £22,100

If you take the surrender value and the £7900 of ongoing payments, do you think you could make more than £22100 over the next 11 years?

prodda

Thank you dunstanh - that was the sort of conclusion that I was coming to but not in such a logical straightforward way. I don't think there's any way that I could get anywhere near £22k over the period remaining on the endowment so will keep on with it. Again, many thanks for your thoughts.

dunstonh

With Aviva, it is the MEP that can make a difference. Without the MEP, surrender would often be the obvious option.

You have realised the important thing that many forget. You are looking at this point going forward and ignoring what has gone before. Many look at the shortfall and look back and surrender because they assume the growth is poor. Often its not that the growth is poor but because the endowment itself was set with a too high target growth rate which may have been fine in the 70s and 80s but unrealistic (with hindsight) in the 90s and 2000s