Using endowment to part pay off mortgage

Featherstoner

I would be most grateful for a bit of advice.

I have a 16 year endowment for £32K with Phoenix ( initially Sun Life I think ) which has 4 years to run. I am now told that it will only be worth £21500 at maturity ( assuming 4% growth - which they think is reasonable! ). The surrender value is £13800.
As it is not a with profits policy I don't think that selling it is an option.
The monthly payments are £115, which if I had put in a box under the bed would be just about the surrender value.

The mortgage is with Portman and has only just been changed to a tracker running at 0.5% above base rate.

It seems logical that if I am only getting a 4% return on the endowment then I should get rid of it ASAP.

To this end I am tempted to cash it in and pay off £6k of the mortgage ( the max without penalties ) and put the £6k into mine ( and the wife's ) ISA and the balance into next years ISA and then pay off £6K next year and so on. In the mean time I would pay the £115/m + the interest saved on the mortgage repayments into the best interest earning account I can find ( or possibly into AVC's although I have 12 years to retirement )


If anyone could give me any suggestions I would be most grateful.

JoeK_3

Featherstoner, you do not mention if you have any other life insurance or critical illness policies. If you cash the endowment in, you will lose the life insurance and will need to replace it and it can be more expensive to replace, as you get older.

Are you both healthy and can you replace the cover.

Please advise.

JoeK

Featherstoner

Sorry about forgetting the insurance part. I have cover provided by my employer and their pension fund ( still a final salary scheme ). I also have a savings plan with Friends Provident that I started some 30 years ago ( currently around £28k ) and which I am keeping in reserve to pay off any major shortfall (and also hoping that it will regain some of the losses it suffered due to the stock market problems. As it is currently performing at 10% I don't want to touch it yet ).

I also simplified the mortgage - it is actually for £60k, £28k being covered from a policy from Legal and General which has been running for 21 years.

Three years ago when I realised that shortfalls were imminent I changed from a £60k interest only to a £50k io and £10k repayment.

Many thanks for your input.

JoeK_3

Please explain your full details.

Here is my understanding:-
£50,000 interest only
Legal & General policy for £ projected?
Friends Provident - for £ projected?
Phoenix - Sun Life projected at £21,500

Most unit-linked policies pay a maturity bonus of around 5% and although they are linked to the stock market have started to perform.

A full picture would be nice before any advice can even begin.

Please advise.

JoeK

Featherstoner

JoeK.
Thanks for your interest. The fuller details are:-

£50000 interest only tracker
£10000 repayment tracker both ending 1/4/2012
Max annual over repayment without penalty is 10% of total ( until 2009 )

Legal & General With profits was £28K projected £22K (£30/month)
Phoenix - unit linked was £32K projected £21500, value £13800 (4%) (£115 / month )

As a savings plan - initially taken out in 1977 two FP unit linked plans total value currently £30000, projected value is dependant on stock market. At current growth rate about £40000 in 2012. Also includes life insurance of £28K

Additional ISA savings of £8000

As you can see I don't have any great problems in paying off the mortgage at the end of its term, however I just think that the Phoenix endowment is a waste of money and I am just wondering what the best course of action with it is.

Regards,

Thanks again.

JoeK_3

My understanding is that you currently have £43,800 available to use to reduce your mortgage.

1) Phoenix - unit linked was £32K projected £21500, value £13800
2) FP unit linked plans total value currently £30000

Both the Friends Provident and Phoenix policies are unit linked and probably linked to the stock market.

You could consider paying the £43,000 off the interest only element of the mortgage and pay the now non existent insurance premiums of Phoenix £115 / month + FP premium £? = £? into the left over interest only mortgage.

This would save you £43,000 x say 5% interest = £8,700 unpaid interest over the next 4 years.

This would lift a great weight off your shoulders and you can then plan for the retirement day with AVC'S.

JoeK

EdInvestor

I'm a bit puzzled about the Phoenix policy.Are you sure it is unit linked? If so, it should perform at better than 4%. Perhaps it is "unitised with profits?"



Post some info about the L&G policy.

Guaranteed sum assured
Declared bonuses
Surrender value
Monthly premium
Maturity date
Maturity forecasts

Mr_helpful

Edinvestor
Your comments really worry me. Your understanding of endowments seems very limited. I am far from a fan of them but before you give advice it is advisable to learn about the product
All endowments carry a 4% projection whether unitised or traditional. It a FSA ruling. It actually means nothing as its only a projection but its in an advisers interest to be cautious with a customer. Over time there have been times when all your beloved stock market performance has been less than this and times when it has been a lot more. There have been times when unit linked policies have been slaughtered by with profits. The difference between unit linked and with profite is largely one of volatility and risk. With profits spreads the risk over the term by smoothing out bonuses etc. The one thing to be aware of before cashing them in is that they tend to pay more at maturity than the companies projections as a result of terminal bonuses.Whereas with unit linking its more directly linked to the fickle nature of investment. Over the last few years the industry has moved away from taking the risk out of investment by smoothing out returns and left the risk with the consumer.

JoeK_3

Mr_helpful wrote: »

Edinvestor
Your comments really worry me. Your understanding of endowments seems very limited. I am far from a fan of them but before you give advice it is advisable to learn about the product
All endowments carry a 4% projection whether unitised or traditional. It a FSA ruling. It actually means nothing as its only a projection but its in an advisers interest to be cautious with a customer. Over time there have been times when all your beloved stock market performance has been less than this and times when it has been a lot more. There have been times when unit linked policies have been slaughtered by with profits. The difference between unit linked and with profite is largely one of volatility and risk. With profits spreads the risk over the term by smoothing out bonuses etc. The one thing to be aware of before cashing them in is that they tend to pay more at maturity than the companies projections as a result of terminal bonuses.Whereas with unit linking its more directly linked to the fickle nature of investment. Over the last few years the industry has moved away from taking the risk out of investment by smoothing out returns and left the risk with the consumer.

From the posts that I've observed Edinvestor tries to be helpful and tends to treat endowments in a rigid way.

You are right in your understanding of the treatment of endowments and the 4% - 6% - 8% projections being imposed on insurance companies by the FSA.

This site is for information only, not for giving advice and we should ALL be extremely cautious of making recommendations instead of asking people to make considerations.

JoeK

EdInvestor

Mr_helpful wrote: »

All endowments carry a 4% projection whether unitised or traditional.

Nonsense.Risk-based products including endowments normally carry projections at three different levels - low, medium and high - the actual figures used can vary with the company but are normally in the 4-6-8% range (lower than pensions because life funds are taxed).

Many WP endowments are performing at the 4% level - and indeed a Phoenix one can be expected to struggle to reach 4%. This is due to the fact that the Phoneix WP fund is alnmost entirely invested in bonds, not in the stockmarket.As a result it is usually sensible to surrender Phoenix WP policies - it is rarely possible to sell them to a reputable provider.

A unit linked Phoenix policy might be expected to do better however, as it should be mainly invested in the stockmarket.Perhaps the OP could clarify what fund his money is invested in.

It's important to get all the figures before taking a view on an endowment, as the performance can vary quite dramatically from company to company, and guaranteed values are sometimes quite high, so the policy is worth keeping.

Posters might also take note that it is quite difficult for IFAs and other advisors to make a clear cut recommendation about endowments, as if they get it wrong they might attract a misselling claim. With profits is complex and hard to understand - many don;t bother, as the products are basically obsolete these days.Thus the waffle level tends to be high. :rolleyes:

However a simple calculation can quite easily make the position clear, as many endowments will now be unable to perform better than a no-risk investment such as paying off the mortgage at current interest rates.

...it's in an advisers interest to be cautious with a customer.

Quite so.But by protecting his own back, he may be responsible for his customer losing money through taking unnecessary risk..

dunstonh

An endowment fund with very low potential for growth can reduce the low, medium and high projections below 4,6 & 8%. However, a fund with a high potential for growth cannot go above 4, 6 & 8%.

So, you could be in a fund that has averaged 10% a year since launch and at 10% would give a big surplus. However, it has to use 4, 6 & 8% and at the 4 and 6% mark it could be showing a shortfall.

The projection alone is not the only way you should review the quality of the product. You need to take account of the investment fund(s) it is in as well. Then look at those two things together (along with a number of other things).

Posters might also take note that it is quite difficult for IFAs and other advisors to make a clear cut recommendation about endowments, as if they get it wrong they might attract a misselling claim. With profits is complex and hard to understand - many don;t bother, as the products are basically obsolete these days.Thus the waffle level tends to be high. :rolleyes:

Posters might also take note that most of the threads in this section about endowments do not take into account all the required information and a number of times the "recommendation" to surrender could easily have been the wrong one. It's quite easy for an IFA to make the decision based on facts. However, if you make a decision with insufficient information (adviser, poster or anyone else) then you dont have a clue if the right thing is being done or not.

However a simple calculation can quite easily make the position clear, as many endowments will now be unable to perform better than a no-risk investment such as paying off the mortgage at current interest rates.

That simple calculation done on here nearly always results in a figure that understates the likely return and automatically favours surrender. The paid up option also gets disregarded too often as well and there have been times when that would have been the better option.