Endowment -should I take the money now?

Statto

I have a Scot Widows 20-year with profits endowment which matures in 2010. I have been paying £130 pm for 17 years. I asked for a surrender valuation from them as I could do with some cash to help buy overseas property and they have offered £43,212. The paperwork says total amount payable on death £50,464 and illustrated maturity value is £52,100 assuming 4% growth and £58,800 at 8% growth.

I'm going to pay a further £3,640 into this and it doesn't feel like its a good investment. Any thoughts anyone?

dunstonh

Projections are just example rates. These can understate or overstate the actual return but the provider has to use 4, 6 & 8%.

Your endomwent actually looks like it is on track for a surplus as the 4% projection figure is higher than the target amount of £50,464. So, congratulations on having an endowment mortgage where you paid less than repayment mortgage and are likely to exceed target.

Can you let us know what the basic sum assured is and the current bonuses?

They need to be added together as that will give us an indication of the cost of surrender by comparing that to the surrender value.

Its hard to say whether its good or not. You could say that overseas property is not a good investment at the moment when you look at the way European property has suffered in the last 3-4 months.

Statto

Thanks

Firstly it is not an endowment mortgage just an endowment policy taken out 17 years ago to pay for school fees when the time came. When the time came to pay school fees I didn't need to draw down and have left it till now.

According to my last bonus statement (2006) the basic sum assured was £27,612 and existing bonuses (inc the 2006 bonus of £747) were £11,861. the Surrender form talks about Current death benefit of £40,051 and Terminal bonus of £10,413. I guess that I won't get the full terminal bonus until the end of the term?

kitchen_buff

Don't surrender it, sell it. Gat the Financial Mail on Sunday, it will give you some companies who will sell it for you. Much better return.

EdInvestor

Statto wrote: »

The paperwork says total amount payable on death £50,464 and illustrated maturity value is £52,100 assuming 4% growth and £58,800 at 8% growth.

if you surrendered it and put it on deposit at a net 5% return also paying in the premiums to maturity you should end up with 55,073. Expect about 4% growth from the Widows WP fund.

I should try here to see if anyone wants to buy it: https://www.apmm.org

Otherwise, assuming you don't need the life cover, you are right in thinking it's not a good investment as you are getting no premium over cash for taking a risk.

dunstonh

Otherwise, assuming you don't need the life cover, you are right in thinking it's not a good investment as you are getting no premium over cash for taking a risk.

It had a target which was probably 7% p.a. and it looks like it is going to achieve that. 7% after tax is not a bad return over the period for a medium risk fund. Especially when life cover would have been payable for a chunk of the period as well. Its obsolete now but that doesnt mean it hasnt been good when you look a the period it was taken over.

The current position is £50,464. The surrender value is £43,212.

Assuming 28 more payments of £130, that is £3640. Add that £3640 on top of the surrender value and you have £46,852.

So the cost of surrender is around £3612. (ignoring growth)

So, any alternative you use would have to make 8.3% before you see any profit. The SW fund is likely to fall somewhere between 4 and 8%. Probably around 6% if it carries on at it's current level so you are really looking at needing close to double digit returns on your alternative to beat the endowment.

On a savings account at 5% net that would be £48,422(surrender value) plus £3863 (£130pm) = £52285 (not sure how Ed turns that into £55073)

So endowment until maturity would likely to be somewhere between £52100 and £58,800. Probably closer to £54k-£55k.

So, if you were going to use savings as an alternative, I would stick with the endowment. If you are going to use investments with the potential for double digit returns, then I would go with those.

Statto

Thanks for all the comments.

I have requested a quote from an Endowment market maker and will see if they will offer more.

As i need to realise some investments for my french house purchase I may have to sell and the comments seem to be saying its pretty much on the margins. I know French property has stagnated but its a purchase with a view to living in France further down the line.

The last bonus statement said the 2006 bonus rates were 1.5% of the basic sum assured and 3% of the existing bonus. I can't see how that will meet 7% targets.

My alternative to selling this and other investments is to take a mortgage on my existing mortgage free house in UK but that doesn't seem like a sensible move, paying a higher interest rate that I am earning on dull investments.

EdInvestor

On a savings account at 5% net that would be £48,422(surrender value) plus £3863 (£130pm) = £52285 (not sure how Ed turns that into £55073)

You've forgotten about compounding.

The last bonus statement said the 2006 bonus rates were 1.5% of the basic sum assured and 3% of the existing bonus. I can't see how that will meet 7% targets.

That's the guaranteed bonuses - there is an unguaranteed terminal bonus as well.Overall, 4-5% is the likely return.You have to account for tax @20% and the cost of life cover as well as the fact that a big chunk of the fund will be in low return bonds and cash, not equities and property.

dunstonh

You've forgotten about compounding.

No I didnt. Used a financial calculator to remove any error of that occuring and just put figures in again and they came out correct as I typed them.

EdInvestor

I stand by my figures. If you think compounding is an 'error' we have a serious problem here, but I'm sure you don't really

Statto

EdInvestor wrote: »

You've forgotten about compounding.

That's the guaranteed bonuses - there is an unguaranteed terminal bonus as well.Overall, 4-5% is the likely return.You have to account for tax @20% and the cost of life cover as well as the fact that a big chunk of the fund will be in low return bonds and cash, not equities and property.

I think on balance I am better getting out now. As the saying goes 'a bird in the hand is better than two in the bush' and it will avoid me having to borrow money to fund the property.

Thanks for all the help.