Scottish Widows Endowment Shortfall Options

rosegirl36

I am concerned about the shortfall prediction on our Scottish Widows endowment which is supposed to pay off the interest only part of our mortgage,there is seven and a half years to go on the endowment and the projections to reach the target of £44650 are currently
£16500 shortfall at 4%, £11500 at 6% and £5000 at 8%, now assuming growth of 6% i have been overpaying the mortgage by £100 a month.
My question is this
The value of the endowment currently is around £16000 so to me seems well short of target.Would a gain of 6% a year over 7.5 years represent a shortfall of £11500, in other words how accurate is Scottish Widows prediction?

vectistim

The 4,6 & 8% figures will[1] have been calculated correctly. These are FSA rates that have to be used and tell you nothing about the performance of the funds the endowment is investing in.
You could do the same calculations yourself in Excel. You have a current value, you have a monthly payment you have deductions[2] and a assumed growth rate.
So all the projections tell you are that if the funds were to magically perform at exactly those rates of returns for the next 7 and a half years those would be the shortfalls.
Assuming you have a 25 year endowment then it was taken out 17 1/2 years ago, at which time (IIRC) the middle assumed rate might have been 7.5% rather than 6%.
If you are overpaying by £100 per month, then presumably the payments will be falling slightly each month[3], or are you fixing them at the current required payment plus £100.

If we believe an exact shortfall of £11,500 occurs and you overpay by £9,000 (£100 per month x 7 1/2 years) then you need to look at what the mortgage interest rate is to see how the £9,000 will eat into mortgage balance. (For £100 you pay off this month you save 7 1/2 years interest on that £100, for the next £100 you save 7 5/12 years interest on that £100 etc)


[1] Barring some very unlikely !!!!-up (Hmm, it won't let me refer to a male chicken)
[2] Deductions: Life cover, management expenses, investment expenses, etc
[3] If you overpay be £100 this month the interest calculation next month (assuming daily/monthly calculation) will be based on a sum outstanding £100 less so the interest required will be falling by about 40p per month (although that figure will start increasing slowly)

rosegirl36

Thanks for the reply
Our Mortgage is part repayment,roughly £15000 still to pay and part interest only £44650 ,rightly or wrongly we have decided to overpay the interest only part by £100 a month which i think is just reducing the balance by £100 each month, we are making the overpayments as a simplistic way to try and offset the £11500 shortfall, i am just not sure how realistic this shortfall projection is? could it end up as a £20000 shortfall for instance.By the way it is a Unit Linked Endowment not a with profits endowment.
All very confusing feels like a ticking bomb

vectistim

If you have a unit linked endowment that means it is investing in some fund (or funds) you will need to look at which funds they are. I expect there were a range of options available from the lower risk end, eg: Cash, Fixed Income, middling risk: Managed, UK Equities, higher middle Europe, USA, high risk: Asia, South America

I would _guess_ that in the absence of any preference from yourselves you may be investing in whatever they call their managed fund. If so, it should be aiming to balance risk and return but will have some volatility with the value going changing, both up and down, each day and will not have any guarantees.

Essentially the question you seem to want the answer to is how will the funds you are investing in perform over the next 7 1/2 years. If someone knew how to find out the answer they a) wouldn't tell us and b) would be very rich.
So the FSA have given these three growth rates for making projections, but they are the same rates all companies use in making projections.
If you look at your paperwork and determine which funds they are investing in you may be able to see how their performance compares to similar funds run by other companies, you probably have some sort of options for switching money from one fund to another, usually there will be a limited number of free switches allowed before charging begins.

As you say there is no with profits element, if you do not think the funds will perform in the next 7 years you could look at the main alternative which would be to sell the endowment, use the proceeds to pay off as much as it will pay off and then see what the costs would be to turn the remainder of the mortgage into a repayment mortgage. From where you are this would be the only guaranteed way to ensure the mortgage is paid off in time.
Here are some back of the envelope calculations on the current interest only bit:
£44,650 lets say 4% interest only = c.£150 per month + overpayment £100 per month + endowment premium say £75 per month = £325 per month
£44,650 less £16,000 surrender value = £28,650
Repayment over 7 years @ 4% c. £390 per month.

If you did that you would also need to consider any extra benefits in the endowment: first off it includes some life insurance (essentially each month it will pay for life insurance for the difference between the £44,650 and the underlying asset value), it _might_ include critical illness cover that would pay out that sum on the diagnosis of various serious illnesses (eg: heart attack), it _might_ include waiver of premium that would keep paying premiums if unable to work due to illness/injury. Therefore you should consider the cost of replacing those benefits of the endowment.

rosegirl36

Thanks for that i will spend tonight considering what to do? I have the mortgage with Intelligent Finance and their current rate is only 2.5% as opposed to the 4% figure you have used and i am paying £94 a month for the interest only part of the mortgage, and my endowment premium is £67

vectistim

I reckon your 2.5% rate would make the repayments about £370 a month. The interest rate isn't making too much difference because by this stage a fair chunk of your monthly payment will be reducing the loan rather than paying the interest. (Interest only would be about £60 a month, so about £310 is repaying the capital) There is probably a repayment mortgage calculator on here somewhere that you could use to try playing with the numbers.

Do you have any other debts? If so they are probably at a higher rate than 2.5% in which case you would probably do better overall to concentrate on overpaying them.
eg: (I'll simplify figures a bit here)
You have £40,000 mortgage at 2.5% = £1,000 of interest being charged per year.
Lets say you had £10,000 of loans and credit card at 10% = £1,000 of interest being charge per year.
You would then have two ways of reducing your interest payments by £1,000 a year: pay off the £40,000 mortgage, or pay off the £10,000 loans and credit cards.

rosegirl36

Thanks for taking the time to reply again, the £370 figure is a bit expensive for us, even accounting for the £94 saving on the interest only part and the £67 saving on the endowment premium, that would still be an extra £209 a month to find.As for any debts we have none at all, no loans,credit cards etc.

rosegirl36

Sorry bit confused is the £370 for total mortgage payment or just the amount to replace the interest only part?

vectistim

£370 is for a 2.5% repayment mortgage over 7 years on £28,650, ie: £44,650 - £16,000 surrender value.

Whereas what you're currently paying is £94 per month interest only on £44,650 + £67 per month endowment + £100 per month overpayment = £261

(As an alternative, as the mortgage rate is only 2.5% it ought to be possible to achieve a slightly higher rate via a cash ISA on the £100 a month overpayments, but this would require you to keep an eye on the rates of both ISAs and mortgage, and I'm not sure over the seven years whether that would achieve much more than about an extra £100, so I'm not sure if that is worth the extra effort)

Going off at very much of a tangent, have you looked at your outgoings? Could you swap utility suppliers about, if you don't have it could you get cavity wall insulation, and could you get your loft insulation topped up to 300 mm? Are you doing your own buildings insurance or is it through IF?

rosegirl36

Cheers
I am pretty on the ball regarding utility bills and all spending generally thanks to this site,you have given me food for thought,still 50/50 on whether to let the endowment run its course as i have noticed that of the £67 invested each month the "amount allocated" has suddenly risen to £95 a month even though i am only paying £67, it says in the small print something about this happening on the 15th anniversary, i must say i have had a close look at this today and it surprised me, so maybe there projection of £11500 shortfall is fairly accurate,this i can live with because of the ovepayments i am making.I will keep a close eye for a while to see if the policy improves or not.

vectistim

I know some policies would allocate maybe 105% in the later years but a 140% isn't something I've heard of before.
You need to look at which funds it is being invested in, there's a great long list of them here:
http://webfund6.financialexpress.net/clientsv21/scottishwidows2/pricetable.aspx?fname=&strRec=0&selCat1=Life%20Funds&selCat2=&selCat3=

Hopefully that link works, I don't know if all of those are available to your policy, but the value of your policy will be based on the number of units it has in each of those funds it invests in.
You should have some options as to which funds are used, and you may (or may not) want to change which funds new premiums are invested in.