Should I keep my endowment or sell it?

iben88

@EdInvestor:
4.24% fixed for two years, no tie-in after that. The fixed period ends in September, which is one of the reasons I am considering ditching the endowment, so that I can reduce the amount of my mortgage, as I don't expect to get such a good deal this time!

@pjala:
A fairly rough and ready calculation suggests that there is not much in it either way, assuming it yields £36,500 on maturity. I posted here just to see if there were any 'hidden' considerations that I hadn't thought of.

Thanks to everyone for their comments so far...

Ian

JoeK_3

iben88 wrote: »

@EdInvestor:
4.24% fixed for two years, no tie-in after that. The fixed period ends in September, which is one of the reasons I am considering ditching the endowment, so that I can reduce the amount of my mortgage, as I don't expect to get such a good deal this time!

@pjala:
A fairly rough and ready calculation suggests that there is not much in it either way, assuming it yields £36,500 on maturity. I posted here just to see if there were any 'hidden' considerations that I hadn't thought of.

Thanks to everyone for their comments so far...

Ian

You should consult a qualified Independent Financial Adviser before deciding what to do with your endowment policy.

Unfortunately there are not many people who can give you the correct information or the proper advice.

JoeK

JoeK_3

EdInvestor wrote: »

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.

Edinvestor, I wish that you would keep to the thread.

You are trying in every way possible to lead the OP to tell him to ditch the PRU policy. I have often stated that unqualified people should take care about giving advice and especially when it's the same advice given to everyone.

We all know that with profits endowment policies accrue both reversionary and terminal bonuses and all insurance companies have suffered badly from the crash of 1999/2000 that has taken 5 years to recover.

Prior to this crash, the longest time that the world stock markets had taken to recover was around 27 months but on this occasion we have seen history being made.

The strongest company to emerge out of the crash is the PRU and we can see that reflected in the reversionary bonuses being paid to investors. Terminal bonuses are accrued slowly and built up by the insurance company over a longer period and we will see this improving year by year.

Opinion is one thing but advice is another


JoeK

dunstonh

In general (simple) terms, if you invested for 10 years at the start of 1990 you doubled your money. in the 10 year period from 1980-1990, you trebled your money. in 1970-1980 you quadrupled.

So, any investment product of that length would show declining returns each year you move forward as you are knocking off good years at the start and taking on a bad year at the end (bad year being a stockmarket crash or early recovery year). The article also fails to factor inflation into real returns.

A drop in average maturity value is not the same as a drop in bonuses. Pru publish their figures about maturities and two years ago, all Pru endowments hit target and the average surplus was £2,200. last year all hit target and average surplus was £3,300. This year they expect all to hit target and average surplus will be £4,400.

So, your declining bonus theory doesn't work. Even the poor quality providers like Pearl have increased bonuses in the last year. Mostly in terminal (or final bonus as they call it) but it is still an increase.

EdInvestor

dunstonh wrote: »

So, any investment product of that length would show declining returns each year you move forward as you are knocking off good years at the start and taking on a bad year at the end..

Exactly so.Good years are still being knocked off, to be replaced by bad years ( or less good years) and payouts are still falling.Just look at the chart.

The question is when will this bottom out, and payouts start to rise again?It's hard to see that it will ever happen at some firms because they have no stockmarket exposure in their WP fund.

The Pru fund is generally expected to make 6% going forward. If the mortgage rate payable from September is the same or more, IMHO there is not a lot of point in bothering any longer with the endowment especially as the TB could fall.

dunstonh

Exactly so.Good years are still being knocked off, to be replaced by bad years ( or less good years) and payouts are still falling.Just look at the chart.

You are lookiing cumulatively though. We cannot change what has gone on in the past. We can only look forward and currently, year on year for the last 3 years, Pru have increased their terminal bonuses.

The Pru fund is generally expected to make 6% going forward.

I had a Pru statement in today for someone it it's showing 8.5% a year increase after premiums since 2004.

iben88

Many thanks to everyone who posted comments. I think I will see an IFA and take it from there.

Cheers, Ian

jamesd

EdInvestor wrote: »

Exactly so.Good years are still being knocked off, to be replaced by bad years ( or less good years) and payouts are still falling.Just look at the chart.

The payouts are falling because bonuses added in recent years were lower than they were in the early years. Like this:

year 1: 120 annual bonus, 95 terminal bonus
year 2: 110 annual bonus, 100 terminal bonus
year 3: 90 annual bonus, 105 terminal bonus
year 4: 100 annual bonus, 110 terminal bonus
year 5: 110 annual bonus, 115 terminal bonus

Policy holders get the annual bonus unless their policy ends, for the discussion following. Now lets see the effect of these numbers on final value of a 3 year policy:

ending year 3: 120 + 110 annual bonus plus 105 terminal = 335 total
ending year 4: 110 + 90 annual bonus plus 110 terminal bonus = 310 total
ending year 5: 100 + 90 annual bonus plus 115 terminal bonus = 305 total

Here both the annual and terminal bonuses are currently increasing but the total payout is still reducing because the effect of less good years in the middle hasn't yet been eliminated. It's what can be expected for a market drop followed by a market recovery, which is what we're in now. It's fully consistent with what both dunstonh and the story say.

All that's happening is that the good years in the statistics are being replaced by the less good recent years than the years 25 years ago. But that doesn't matter at all to anyone who still has a policy - for them it has already happened and they can't change it. The values for those who have a policy today aren't still falling. They already fell because they had the policy during the year of lower return.

With both annual and terminal bonuses rising in the example and the past years already part of both the projected and redemption values it's not possible to get rid of the less good years by switching.

What you can do is look to the future of the annual and redemption bonuses and investment returns and see if those appear to be higher than the alternative options.

At the moment you seem not to be factoring in the increases in bonuses now being paid, but instead concentrating on the lower bonuses that are already locked in whatever decision is made. That's not the way you or anyone else should be looking at it because the past is already gone and the future is what matters.

EdInvestor

jamesd wrote: »

Here both the annual and terminal bonuses are currently increasing but the total payout is still reducing because the effect of less good years in the middle hasn't yet been eliminated. It's what can be expected for a market drop followed by a market recovery, which is what we're in now.

Yes.But the question for a person with a policy coming up to maturity is: has this process finished?Or will the payout keep declining for a few more years yet?In which case, he would be better to cash in now and not waste the rest of his premiums so as to get a smaller payout at maturity than if he surrendered today.

dunstonh

But the question for a person with a policy coming up to maturity is: has this process finished?Or will the payout keep declining

I think you have missed the whole point.

Or will the payout keep declining for a few more years yet?In which case, he would be better to cash in now and not waste the rest of his premiums so as to get a smaller payout at maturity than if he surrendered today.

Someone that started their plan 20 years ago has never had and never will have bonuses on their plans from 21 years ago or before that.