Should I keep my endowment or sell it?

iben88

When I bought my first house in 1989, I took out a 20-year interest-only mortgage for £36,500 and an endowment policy to go with it. Like many people, I have since received letters telling me that the endowment would not yield the expected amount, been through the process of claiming compensation for mis-selling, and did receive some compensation.

I have moved house a couple of times since then, and my current mortgage is mostly repayment, with only £25,000 on interest-only, covered by the original endowment. My reasoning was that the endowment might not yield £36,500, but it should easily yield £25,000.

The last letter that I received from Prudential said that the endowment was now back on track to yield the full £36,500 when it matures in 2009. I contacted them for a surrender value and they quoted just under £32,000. I have been offered over £33,000 to sell it.

My question is, should I keep the policy for two more years until it matures, or should I sell it now and pay off the interest-only part of my mortgage?

Obviously my outgoings will decrease if I sell now, as I will not have the endowment premiums or that part of the mortgage interest to pay, plus I will have the surplus over and above the £25,000 to spend (which would be nice!). On the other hand I will (hopefully) get a larger lump of cash in two years time.

Are there any other factors to consider? For example, are there any tax implications in selling or surrendering early (I am a higher-rate taxpayer)?

I realise people may not be able to comment on my exact circumstances, but any suggestions or advice would be most welcome!

Thanks,
Ian

dunstonh

Pru endowments have yet to fail and all 2007 maturities are on track to hit target and pay an average surplus of £4400. That is an increase on 2005 and 2006.

If you surrender early (or sell) then Pru or the other party benefit.

EdInvestor

On the other hand, Pru terminal bonuses are still falling.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/05/12/cmendow12.xml

If that continues, then your remaining premiums would be wasted if you kept on paying in.

dunstonh

EdInvestor wrote: »

On the other hand, Pru terminal bonuses are still falling.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/05/12/cmendow12.xml

If that continues, then your remaining premiums would be wasted if you kept on paying in.

You are misreading the data. Pru bonuses have increased not declined.

iben88

Thanks dunstonh and EdInvestor for your replies.

I'm still not clear from your replies and the Telegraph article which way I should go. I was under the impression (and I can't remember where it came from) that terminal bonuses where nowhere near what they used to be in the 'old days', and so might not be much of a factor in my decision, but perhaps that is not the case...

Any input on the tax implications of selling/surrendering early?

Thanks,
Ian

dunstonh

The telegraph article should be ignored as it is Ed misreading it.

Terminal bonuses are lower than the "old days" but they have been increasing again and Pru have seen increases each year for the last 3 years.

There is no tax implication as you have "qualified" the policy.

EdInvestor

Acccording to the Money Management survey - regarded as authorititative in the industry,and on which the Telegraph article is based - a Pru 25 year endowment paid out 50,498 in 2006 and 49,382 this year, a fall of 1,116.

It is quite possible that the Pru's regular annual bonuses are rising, but that its unguaranteed terminal bonuses are falling at the same time, thus leading to a net loss overall.The vast majority of insurers are paying out less every year as you can see from the chart.

This is an example of the "smoothing" effect of With-profits.In fact much of that terminal bonus money (which reflects profits from equities) was actually lost in the 2002-2003 market crash, but smoothing means it doesn't get taken away from a policy all at once (as with unit linked investments), but over a period of years.

Hence you can end up with this kind of anomaly where it is better to surrender in advance of the maturity of the policy.

dunstonh

That isnt due to a decline in termanal bonuses in the last few years but a period of reduced bonuses over the term.

It's a bit of daft way to measure returns as all returns are down before you consider inflation.

welnik

I think if I were in your position I would hold on to it. You should be able to get a rough idea of the terminal bonus (if any) and take it from there.

EdInvestor

Ian

What interest rate are you paying on your mortgage?

pjala

I wouldn't, work out what you get in cash, and how much you could earn from this in the time left