Endowments and trading in new angle - please help

pjala

Ok, I have posted before on this and previously decided to keep my endowment going. With current payouts and bearing in mind the low payouts for Friends Provident, I am changing my mind.
I already have some quotes for TEP cashins for my policy, and this amounts to a top value of 13400, with 9.5 years to go on the policy.

Using a compound interest calculator, my original sum assured is 42500, it would take a return of 9% per year to achieve this. This is ignoring the life element of the policy. But under the current policy, I am looking at a return of around 28000 at most. What they are tending to do is only add around £20 a year onto my 5100 bonus amount, on top of my 15000 guaranteed amount.

My reasoning is that FP are only a type of investment fund, albeit a limited one. This would mean they could only achieve a return which was at most comparable to the big funds available through Hargreaves Lansdown or other brokers, so if I invest in a fund, why should I not be able to achieve the same? Just keep making sure the fund invested in, is in the top quartile every year - sure I'll make mistakes, but FP has and will make mistakes too.

I am not looking at investing in shares, but funds only - plus hiding the money in ISAs as and when, to limit tax.

Is my reasoning ok? Or am I missing some vital fact about endowments. There is talk on the forum that the endowments are a better investment at the moment, but surely only as good as other funds available?

Just on another depressing thought, my £60 per month over the last 15.5 years, with the enhanced cash in value of 13400, has meant that I have had an interest rate of 1.8% per annum applied to my savings! Surely it is throwing good money after bad to keep it going.

jamesd

Your reasoning is fine, except for two details.

The "invest in a fund" part would be a poor choice. Better a selection of funds matching your desired risk profile - and that should be fairly high to achieve your objective. Adding European and global funds to the mix would probably do better than sticking solely to the UK.

The endowment does offer a guarantee for the amount already allocated to you. You could lose more than that if funds you chose did poorly.

Since you'll be doing it with investments, it's also worth deliberately investing more than you require, to give you a significant cushion against under-performance. Then you can retain the unused investment portion after repaying the mortgage. For any mortgage portion you might want to deliberately start shifting the money into low risk investments in chunks of say 10% of the mortgage target value starting 5 years before the end, to reduce the risk of a fall seriously affecting your ability to meet your target. If you want a minimum additional investment idea, you might consider the difference between endowment and repayment mortgage monthly payments.

HelpWhereIcan

You also need to factor in the cost of replacing any life & critical illness cover that may be built into your endowment - unless you already have "enough" to cover your mortgage and dependants.

Do not forget that a with profits endowment may also attract a terminal bonus. At one time these used to be a sizeable amount and although they have dropped significantly (or disappeared in some cases), there is an argument that they are on the way back up (hence why there is talk that they are 'better' at the moment). What the picture is with FP I do not know, but you would be better informed if you check before making your decision one way or another.

EdInvestor

What interest rate are you paying on your mortgage?

At the moment many people are paying 6-7%, which is the standard basis for expected returns from equity investments in funds. (FP endowments are expected to make somethat less than this).

You may find it's better to use the surrender value to pay a chunk off the mortgage and then increase your mortgage payment by the monthly endowment premium to benefit further.

And of course there's no risk.

pjala

To answer the questions in order.
No funds are excluded from this, that's why I would choose HL as the broker
I was looking at the global best ideas from Skandia, or the Neptune Russian fund. Go for one year with one of these, then move it on to the next best idea.

Don't really know how to deal with the "downside risk" side of this, but just relying on advice / HL's best 150 funds for guidance.

I have already moved the whole of the mortgage onto a repayment basis, so the endowment is a savings plan for 9.5 years time.

We have life cover for the current mortgage, but this joint life cover is costing us £55 for £90000 for around 10.5 years, as opposed to £60 for £42500 for 9.5 years (60 is for the whole of the endowment - so god knows what the life cover element is costing). Also get sum from work, so this can be added in to the equation.

Current terminal bonus, it was difficult to get them to commit, are around 30%, up from 22% earlier in the year, but this is only on the £5000 part of the guaranteed bit. They are not adding significantly to the guaranteed amount, to limit their ongoing liabilities so they can speculate more ( I think). So I would need a terminal bonus in the region of around 200% at least to make it worthwhile.

Currently paying 5% fixed on my mortgage, locked in and cannot pay anymore, for the next 3 years. I get more than that on BS savings accounts, so not really worth bothering about thinking about paying this off for 3 years at least.

A thought is, I could reduce the life cover for the first life policy, from 55 a month to around 30 a month, which gives me cover for around 50000 instead of the current 90000. So in effect the FP policy life element is £25, so the policy is now in effect costing me £35 a month...... Revised calculations at the bottom....

The other bit is, if I have the liquid cash, I can see how it is building and adapt my investment scenario accordingly - whereas with endowments it is all on trust and hope.

Revised calculations, working out using the life policy element, it means that the endowment would have grown at around 4 to 6% over the last 15 years, allowing for £25 ish per month life element - but there are all sorts of variables in there I can't imagine how to calculate in. It looks more favourable, but only a bit.

EdInvestor

The endowment ( a risk product) would appear to be returning much the same as cash ( a non risk product).You also appear to be paying for expensive life cover you don't need.

The way forward would appear to be

a)Surrender or sell and place on deposit until you can use the money to reduce mortgage - the no-risk solution.

or

b)Surrender or sell and use the proceeds to invest in a modern risk product within a proper tax free wrapper, with a likely risk based return of 7%.
Note that endowments have high charges and that capital gains within the fund pay life company corporation tax of 20%.A modern fund in an ISA will have lower charges and be tax free.