Cash in endowment

jrh100

Hi, I have a 25 year with profits unitised endowment policy with Friends Life (previously AXA) due to expire in March 2019.
The fund value is £11k. On top of this is a 74% terminal bonus (currently worth £8k) and a 4.8% reorganisation bonus (currently worth £0.5k). The current surrender value is therefore £19.5k.


These bonus rates appear to go up and down dependent on market conditions; I am therefore wary that a crash in the stock market over the next couple of years may result in a lower final fund value.
I have asked Friends Life if there is any incentive to keep the policy open until maturity - I was told they didn't know whether there would be any additional bonus applied if left until maturity (!).
So the question is do I cash in now?
Thanks in advance.

TrickyDicky101

The terminal bonus very likely will fluctuate to some extent with market conditions so your answer really depends on your own attitude to risk and whether or not you have a better use for the surrender value if you surrendered now.

dunstonh

The fund value is £11k. On top of this is a 74% terminal bonus (currently worth £8k) and a 4.8% reorganisation bonus (currently worth £0.5k). The current surrender value is therefore £19.5k.

Can you confirm what the surrender value is. You have added those things together but that is not necessarily the same as the actual surrender value. Torwards the end of the plans life they do become similar and eventually match but for most of the period, the surrender value is different to the current position.

These bonus rates appear to go up and down dependent on market conditions;

The annual bonus will be relatively stable and very low. The final bonus is the one that moves with investment returns.

I was told they didn't know whether there would be any additional bonus applied if left until maturity (!).

The annual bonus is guaranteed and cannot be taken away. The final bonus is variable and can be taken away or added to.

So the question is do I cash in now?

Crystal ball job.

jrh100

Thanks TD.
Unless I'm missing something I think I'm inclined to cash in now. It's a gamble I know but I've been stung by stock market crashes before. Even if left in an account paying 1.5% interest with the savings I'll make on premiums, the amount would be effectively worth £21k in a couple of years time which will be sufficient to pay off my mortgage.

jrh100

Sorry Dunston, just seen your reply, thanks.
The surrender value is £19.5k. FL have advised that the terminal bonus and reorganisation bonus will both be payable if surrendered early (although not guaranteed at current rates). I was also informed that annual bonuses don't apply to this policy as it is a unitised investment; it appears that there are no guaranteed bonuses at all which is why I am seriously considering cashing in now.

jrh100

A further update with regard to the opening post. The current surrender value is £19,600. I have recently received a letter from Friends Life which says there is a high risk of shortfall on the policy. FL project that with a growth rate of 3.5% the policy will be worth £19,700 at maturity in 2 years.
I'm struggling to understand this; if it is worth £19,600 now and I have a further £1k to pay in premiums over the next 2 years, and if we also factor in a growth rate of 3.5% how do they get to a projected final amount of £19,700?
Any comments gratefully received!

dunstonh

jrh100 wrote: »

A further update with regard to the opening post. The current surrender value is £19,600. I have recently received a letter from Friends Life which says there is a high risk of shortfall on the policy. FL project that with a growth rate of 3.5% the policy will be worth £19,700 at maturity in 2 years.
I'm struggling to understand this; if it is worth £19,600 now and I have a further £1k to pay in premiums over the next 2 years, and if we also factor in a growth rate of 3.5% how do they get to a projected final amount of £19,700?
Any comments gratefully received!

Projection methods are flawed. They have quirks.

Some include a deduction of 2.5% for inflation to give you a "todays value" style projection. i.e. what the maturity will be in todays spending power

All of them project before charges and cost of life assurance. So, if an endowment is growing at say 5% p.a. in the real world then the projection figure would likely need to be 7% or 8% to give an equivalent that matches the real world figure (or higher if the inflation is included).

Some providers, on with profits plans, will project forwards using the current value but not include any final bonus accrued to date. i.e. if your plan current position was £19500 but £1500 of that was final bonus, then they would project from £18000 not £19500.

Some providers project from the surrender value of the plan rather than the current position. That was always funny as you used to see projected values that were lower than the guaranteed minimum possible.

So, the important thing is to look at the assumptions. Not all will be mentioned on the projection. The trained eye will spot issues or quirks straight away but those giving it a quick glance may miss what the issue is.

For reference, pension projections have gone daft as well. They have moved to a position of understating the likely return leading to some people making bad decisions as they do not understand the changes.

jrh100

Thanks Dunston. If only Friends Life were as helpful!

phil24brown

In a similar position, my endowment pays up in Feb 2018, the latest statement is much better than previous years, possibly due to the Stock Market doing well at the moment...


So the same big question, wait until next year or bail out now with the FTSE on a significant high and lots of uncertainty about the Brexit affect...


Anyone got a crystal ball ???

dunstonh

So the same big question, wait until next year or bail out now with the FTSE on a significant high and lots of uncertainty about the Brexit affect...

How much of your investments are linked to the FTSE?
The FTSE has been one of the weaker growth areas. Chances are your investment is spread across multiple assets. So, perhaps using the FTSE is not a good guide

Anyone got a crystal ball ???

No