Mortgage Endowment Illustration Questions

Jonny7

I would like to ask a couple of technical questions to any IFAs or someone who really understands with-profit endowments.

Below is part of the illustration of a 25 year endowment mortgage that I was shown in January 1993 regarding the future benefits of a Build-up plan.

(a) a rate of return of 7.80% per annum is £ 45000
(i.e. your mortgage would be repaid in full)

(b) a rate of return of 10.50% per annum is £ 65100
which would give you a cash surplus of £ 20100

(c) a rate of return of 7.00% per annum is £ 39300

(These projections are based on an investment premium of £59.55)

At the end of the term, a guaranteed basic sum of £16560 will be payable to which bonuses will be added.

It also says "The current rate of reversionary bonus is 3.50 % of the guaranteed basic sum assured plus 6.80% of accumulated bonuses. The rate of Terminal Bonus will vary according to year of entry and is subject to variation at any time"

Question 1) Am I correct in assuming that the projections should have been based on an investment premium of £55.20? (i.e. £16560 divided by 300).

Question 2) I have used an investment calculator to check the projections and have come up with what I think of as "net" interest rates which are (a) 6.56%, (b) 8.85% and (c) 5.68% and presuming these "net" rates are a result of taxation, give taxation rates of (a) 16%, (b) 15.73% and (c) 18.85%. My question is that (a) and (b) are similar but (c) is somewhat higher. Why is that so? or am I oversimplyfying things?

EdInvestor

Endowments are subject to 20% life assurance company corporation tax on gains.

Working out what is going on in a With profit fund is the job of an actuary and it is no accident that these charcters bear the nickname "Mystic Meg".

:rolleyes:

dunstonh

Endowments are subject to 20% life assurance company corporation tax on gains.

Only on the assets which give rise to capital gains. On a with profits fund, not all the assets will be chargeable. It would really depend on the asset mix and whether it is a high equity WP fund or a low equity WP fund.


Projections usually do not include the current terminal bonus accrued on the policy. So that can understate the position. Also, for some very old endowments, it isnt possible to generate a current value to projection from so a few insurance companies project from the surrender value. Standard Life used to be the most common example of this where the lower projection would provide a figure lower than the guaranteed minimum maturity value. They corrected this in two stages over the last year.

Jonny7

Thank you for your replies.

Can I make it clear that this was the illustration that was shown to me at the point sale before I was sold the Endowment Policy in 1993.

My first question referred to what I think is the "Lautro Charges Fiasco". My understanding is that the investment part of my £64.05 a month payment (i.e. less company assumed fees and charges) was guaranteed as the "Basic Sum Assured" which was £16560 and dividing this by 300 gives a monthly investment of £55.20 and that the £59.55 shown on the illustration represents my £64.05 a month payment less "Lautro Charges" and not company assumed charges and that therefore there was no chance of the "Target value" being met at the quoted rate of return of 7.8%. I am seeking confirmation if what I believe is true or not.

Admittedly question 2 is messy it just seemed that the higher the rate of return the lower the tax rate (or is it a tax rate?) I do not think it worth mentioning to the FOS.

EdInvestor

Don't forget to factor in the cost of life cover.

EdInvestor

Tis article may help clarify on the Lautro charges issue:

http://business.timesonline.co.uk/tol/business/money/property_and_mortgages/article2326740.ece