A dilemma, should I stick with endowment or surrender??

Emmalou

To all you very helpful people, I would really appreciate your advice to help me make up my mind (although, yes I know I should be going to a IFA).
I have been offered compensation for my HSBC endowment policy being missold which is great news (£3600):j
They have also offered to pay me £16500 to surrender my policy as well as offer replacement life cover at a cost that it would have been the case when I took out the policy (I do need the life cover).

Details of Policy:
Target Amount: £50,000
Started 1991, due to mature 2016
At the last statement date they are projecting the following:
At 4% - £28,000
At 6% £33.500
At 8% - £39,500

Although I like the idea of surrendering to reduce my mortgage (especially with interest rates going up), I am worried that to do so would be foolish as I would miss out on greater returns later. I don't need the money now exactly, but it would make life a bit easier!

Thank you for any advice you can give.

tightwadman

It depends who you are with but if like me you are in a zombie fund you might as well pull out now and put your money where it will grow. I was with Sun Alliance - bought out by Resolution / Phoenix and since these monkeys took it over they have slashed both annual and terminal bonuses to the point where it simply is not worth having. As it is a zombie fund with no new polices being sold / funds added there is no possibility of a recovery. For the last two years I have received just £30 a year in annual bonus. If I invested the money already secured in my policy I could do at least 10 times better. As it is my policy matures in late 2008 and the only reason I am hanging on is the terminal bonus. We are now in Mid May and they still will not reveal how much was added in annual bonus in December 2006, this is against FSA regulations.

Check your fund carefully but you can take those projections with a pinch of salt - they are just fairy tales!

dunstonh

For the last two years I have received just £30 a year in annual bonus. If I invested the money already secured in my policy I could do at least 10 times better.

You musnt forget the guarnateed sum assured and terminal bonus. You have only mentioned the annual bonus which is likely to remain low.

That said, a phoenix plan isnt one you would choose to be in, if you had the choice.

Check your fund carefully but you can take those projections with a pinch of salt - they are just fairy tales!

Only the conventional with profits and some unitised with profits projections understate the likely amount. Plus if you are going to give incomplete info, at least they give lower than likely figures.

Unit linked endowments, which the HSBC endowment is, dont suffer the same problem as they have a daily value.

EdInvestor

Emmalou wrote: »

Details of Policy:
Target Amount: £50,000
Started 1991, due to mature 2016
At the last statement date they are projecting the following:
At 4% - £28,000
At 6% £33.500
At 8% - £39,500

Post the endowment monthly premium and the interest rate on your mortgage for a view.

Emmalou

Thank you for your advice/comments folks.

My monthly endowment premium is £86. I am on a fixed rate mortgage at the moment of 4.75%, but in January I have to remortgage to no doubt a higher rate.

Dunstonh - your comment about HSBC endowments: what does that mean for their projections? Does it mean they will be more accurate, or does it mean that they overstate their projections?

dunstonh

The HSBC endowment will be unit linked (assuming here that it is HSBC Life). Projections on these will be accurate if those rates are achieved. The inaccute projections applies to older conventional with profits plans (which you do not have).

EdInvestor

Let us assume your new mortgage rate will be 6%. If you surrendered the endowment and used that money plus the compo to reduce the loan and then increased your existing mortgage payment by the amount of the endowment premium, by the time the loan matures you would have 46,200 pounds.

As you can see they are projecting a return of only 33,000 pounds at a 6% growth rate - that's because of the charges and taxes you are paying in the policy.

You'll do better to dump this policy and devote the money raised to reducing the mortgage directly by overpaying it.

dunstonh

A number of the HSBC funds are exceeing 6% p.a. (after charges) The surrender penalty may also cost you are few percent equivalent as well.

You need to weigh up all the things not just this. Otherwise you could chuck a perfectly good endomwent away.

You are paying £86. How much will replacement life cover cost. Deduct that from the £86 otherwise you are not taking the life cover into account. Ed never includes that in her figures so they automatically look bad due to bad data input.

EdInvestor

Ah yes thank you for reminding me about the life cover issue.

They have also offered to pay me £16500 to surrender my policy as well as offer replacement life cover at a cost that it would have been the case when I took out the policy

Be sure to check this 'kind offer' against the cost on the open market, as life cover costs have reduced substantially in recent years, usually by more than enough to cover increased age. :rolleyes:

For many people, the key factor in judging the way to go is the risk question: when the return is likely to be higher or the same by paying off the mortgage as continuting with the endowment, you are being paid nothing for taking a risk.And in the case of those missold, very often they weren't aware they were taking a risk in the first place.

There is no point in taking a risk if you are not likely to get any reward.