Endowments and tax if you pay mortgage off

ThanksForThe_Help

Hi.

We have 2 endowments, primarily to pay off our interest only mortgage. We find ourselves in the fortunate position to be able to completely pay off the mortgage from other funds, while retaining the endowments for the remaining 2 years of their 25 year life should we choose to do so.

Both policies are 'qualifying' and doing surprisingly well, exceeding the amount required to cover the mortgage. Although not guaranteed to grow more, they have built up sufficient annual bonuses to make them a reasonable ongoing saving plan and they provide life cover of course. While appreciating 'terminal bonuses' are not guaranteed, they could improve their value even further at maturity. I would appreciate if anyone could answer my questions:

1. I understand their 'qualifying' status means we are not liable to tax on the profits if we continue paying them and, as the building society has a call on them, use part of the proceeds to pay the mortgage off once they mature, or if we cash them in early to pay the mortgage off. Is that correct?

2. If we pay off the mortgage now from other funds but continue the endowments, would removing the mortgage lender's call on a portion of the maturity values change the policies 'qualifying' status and then leave us liable to tax once they mature?

2. If we pay off our mortgage but continue the endowments, would we be liable to tax if we cash them in early, before maturity (for the same reasons as above or any others)?

Very much appreciate your help.
Regards

dunstonh

1. I understand their 'qualifying' status means we are not liable to tax on the profits if we continue paying them and, as the building society has a call on them, use part of the proceeds to pay the mortgage off once they mature, or if we cash them in early to pay the mortgage off. Is that correct?

As long as the qualifying plan has qualified then you are ok. The easiest qualification criteria is for the endowment to have run for 10 years without any premium change.

2. If we pay off the mortgage now from other funds but continue the endowments, would removing the mortgage lender's call on a portion of the maturity values change the policies 'qualifying' status and then leave us liable to tax once they mature?

Assignment to lender (or its removal) has no impact on it.

2. If we pay off our mortgage but continue the endowments, would we be liable to tax if we cash them in early, before maturity (for the same reasons as above or any others)?

Only if they havent qualified.


Other issues to consider are the cost of surrender (difference between current value and surrender value) and if the plan has any mortgage endowment promise (MEP). The latter is lost on early surrender and its not unusual to see the MEP being worth thousands or even tens of thousands of pounds (if you have it).

ThanksForThe_Help

Thanks for your reply Dunstonh, realy appreciate it. The surrender values are good, better than the current values as there seems to be some element of final payment in there... which makes me think hang on to them and see if they achieve any additional (and hopefully healthy) terminal bonuses.
I don't know what an MEP is. Guess I'll have to look it up and maybe ask the endowment people, but they are very slow to respond and don't always answer the actual questions.

Again, thank you,
:-)