Endowment terminal Bonus?

green_man

We have an Endowment with Friends Life that is due to finish in December this year. The original amount to be covered was £47500. Obviously the actual estimated amount at completion is going to be much less than this hence we have been paying down our outstanding capital accordingly.

Anyway here's the query/concern.

Last years statement (13th December) has estimated target fund of:
- If Investments grow at 0.6% - £33500

This has been pretty consistent with the last 5 years statement with a predicted target figure consistently in the £30-33K range. However when you actually look at the 'Value of Plan' figure it is only £20k, so miles short of the estimated £33K.

Do these type of policy have a terminal bonus typically. We have based our paying down on the estimates they have provided for the past 5 years and I will be far from happy if the plan comes up £13K short of their minimum estimate.

Actually just reading the docs again it does say a Final Bonus MAY be payable but gives no indication or guarantee on what level it may be.

TrickyDicky101

If its a With Profits endowment (likely) then yes it should have a terminal bonus when it reaches maturity (or even on earlier encashment if you decide to go that route).

However, Final Bonuses (unlike the annual, or reversionary, bonuses) are not guaranteed and are dependent on the value of the 'investment pot' at the time of maturity of the endowment (or earlier encashment).

If there is a big stockmarket crash in the next 12 months then the final value could well be below the projection you have at 0.6%. Alternatively, if the stock market soars you may well get more.

EDIT: what was the basic sum assured when you started the policy? This plus the annual bonuses is the guaranteed minimum your endowment will repay at maturity - the life office can't pay you less than this.

green_man

It is a with profits but I don't have a 'basic sum assured' as far as I can see. Just an original amount covered of £47500K.

I've looked back at statements in the 2008-2009 period and even here they had the estimated target figure in the £27K-£35K range so yu would have assumed these figures would have taken account to the 2008 crash?!

TrickyDicky101

The final bonus is determined principally by the value of the asset pool on maturity - what happened in the intervening years is usually of much less relevance so estimates from 2008/09 are useless now.

You will have had a basic sum assured - perhaps check your original documentation.

green_man

The final bonus is determined principally by the value of the asset pool on maturity - what happened in the intervening years is usually of much less relevance so estimates from 2008/09 are useless now.

I understand that - but - back in 2009 if a market crash was going to affect the terminal bonus surely at that point the estimate given then you would have expected to reflect a minimal terminal bonus due the the market recently having dropped 50% ?. This doesn't seem to have been the case and the estimated final figure is similar to what we see now.

TrickyDicky101

Yes but the 2008/09 figure would be projected forward (to maturity) using the future premia and growth rates - it wouldn't have been an estimate of cash in value at that time.

FormulaDriven

You can contact the company (phone / letter) and they should be able to provide a current surrender value and confirm any final bonus included in that. Given the short term until maturity, that shouldn't be too different from the maturity value - the main difference will be the premiums you've still to pay in. Of course, if there is a big swing in the markets between now and maturity, the value will change, but it will give you a better idea.

It may be that your contract is unitised with-profits, so the current value is the unit value (which will be guaranteed at maturity), to which FB will be added.

green_man

Yes but the 2008/09 figure would be projected forward (to maturity) using the future premia and growth rates - it wouldn't have been an estimate of cash in value at that time.

Right - I understand your reasoning - fair enough.


Any idea if in this type of policy they 'hedge' the final bonus in any way to de-risk it? in the same way that you might with a pension fund prior to buying an annuity? Obvoulsy if the market were to dive and the payout to be significantly under their estimates that would be a problem

FormulaDriven

green_man: you are talking about "lifestyling" in pensions where for the final years up to retirement, your fund is gradually switched over from equities to cash or fixed interest to hedge against annuity interest rates. I've not heard of anything similar being done for endowments.

In fact you don't want to "de-risk" final bonus as that is the investment element where you take market risk in the hope of earning better returns. The reduction in investment risk comes with a with-profits endowment from (1) the guaranteed maturity value (ie if markets really plunge, you will at least get the guaranteed sum) and (2) probably smoothing rules, which means that if markets do fall or rise sharply, final bonus is not immediately cut or raised to fully reflect that - the company's PPFM would set out what rules apply to the policy.

TrickyDicky101

I can only comment what the life company I currently work for do - equity risks are hedged in the With Profits fund currently limiting downside risk (at a cost) so market falls will be compensated by increases in the hedge value.

However, a significant proportion of WP funds can be invested in debt type instruments (gilts and corporate bonds) and it is unusual - in my experience - to hedge these.

Any hedge present in the fund will not be aimed at hedging the future value of any particular policy please note - it will be with the aim of hedging the entire fund. The only exception would most likely be if your policy carries specific guarantees which may necessitate specific hedging strategies.

green_man

OK thanks.

Reading the policy docs along with these posts and the previous statements I think I can be reasonably confident that even in a market downturn my final figure will be around the figure they have estimated.