Endowment -should I take the money now?

budget_counsellor_shaz

I cashed in my endowment policies about 8 years ago. I had about 3 companies that were interested so I negotiated between them. I did well and I was proud of the fact that I got so much more than my first offer from the surrender value.:D

Try to get the highest amount possible it is a little time consuming but definately worth it.:T

All the best

Shaz

jimatko

You may be correct in saying you are playing around the margins in deciding to surrender the plan or not so my reply may be academic.

One thing to think of is that if a second hand market maker offers you a higher price than Widows you must remember 2 things;

1. It will make a margin
2. The purchaser will be looking for a return circa 8%

The projection you have received is almost meaningless and shouldn't be relied upon. With Profits are complicated and you should ask Widows for their PPFM (basically a guide to their principles in managing the fund).

Widows is actually a relatively strong fund (7/10 - Cazalet Consulting). It is the terminal bonus that you are waiting for and you should establish how Widows calculate this if you surrender early.

Remember there is no further liability to tax providing the plan has ran 75% of its term and you have maintained the premiums on a regular basis.

dunstonh

Ed your figures are wrong. I use software to calculate but doing it manually the 43,212 @ 5% = 2160. £43212+2160= £45,372. £45,372@ 5% = 2268. £45372+2268 = £47640.

Then there is about 6 months left after that, My software gives the period £48422 then add in £130pm and you get £3863.

£3863 + £48422 = £52,285

Your figure cannot be as high as you make it unless you are using the wrong number of years to compound it over.

jimatko

The issue here is one to do with the Widows bonus policy and not a linear calculation of how much will be paid in and rolling up of surrender values.

dunstonh

Not in the case of Eds calculation. She is treating the surrender value as if it was put in a savings account giving 5% and then comparing that to the projections. She has miscalculated the savings account option which makes the Scot Wid endowment look worse than it is.

Conventional with profits plans are notoriously hard to project using conventional methods because you have the basic sum assured which is fixed, you have the annual bonus which is likely to remain low and you have a final bonus which is more reflective of performance. However you also have providers that will review the terminal bonus on maturity and make adjustments which are not necessarily appranent on projections before hand. Std Life, for example, are well known for doing that with 3 month maturity notices showing a shortfall and the actual maturity ending up in surplus.

m_c_s

jimatko wrote: »

One thing to think of is that if a second hand market maker offers you a higher price than Widows you must remember 2 things;

1. It will make a margin
2. The purchaser will be looking for a return circa 8%

Widows is actually a relatively strong fund (7/10 - Cazalet Consulting). It is the terminal bonus that you are waiting for and you should establish how Widows calculate this if you surrender early.

I think it is optimistic to expect Scottish Widows endowments to return 8% or above. I am in the process of selling mine. I made the decision on the basis that the Widows with-profit fund has not performed well and it has less than 50% allocation to equities (the average with-profits fund has decreased exposure to equities over the last five yrs from two thirds to a third!). I cannot see how their managment can return in excess of 8% with that strategy in the long term. In my mind I think with-profits endowments are an out of date investment vehicle.

jimatko

Any purchaser of a 2nd hand endowment policy will be looking for a risk premium for doing so. They will be expecting returns to maturity circa 7-8% pa.

The return is simply a function of what they will pay you and what they will receive at maturity, not what the current asset allocation is (unless it's a very long term policy - in which case the risk premium will increase).

I'm not an advocate of WP policies but it is an incredibly complicated subject (which may be reason enough to bail out) and broad brush comments are not valid.

For plans close to maturity remember that buyers are looking for a low risk investment that will pay a premium over cash. On top of that the market maker and broker will make a margin.

Someone will only buy your policy if it gives them a good return. So, whilst you may want to get rid the buyer will think they are getting a good investment. 2 opinions about the same investment but poles apart

m_c_s

jimatko wrote: »

The return is simply a function of what they will pay you and what they will receive at maturity, not what the current asset allocation is (unless it's a very long term policy - in which case the risk premium will increase).

Surely what they will receive at maturity is a function of how the fund has performed which is linked to asset allocation and thus the startegy of company involved. Scottish Widows is not a star performer!(although clearly things may change in the future).
I wonder if the second hand market believes that over the next 5-10yrs endowments will return 8% and if so on what basis are they making that judgment. I cannot however see returns of 8% in the short term.

dunstonh

I cannot however see returns of 8% in the short term.

I wouldnt use 8% on Scot Wid. 6% is probably closer to the mark although with property investments going off the boil a little and fixed interest running poorly at present, you may see a few years of 4-5% depending on how equities go. NU and Pru have been running double digit (when you include annual and final) in recent times so its possible with the better with profits funds.

m_c_s

dunstonh wrote: »

I wouldnt use 8% on Scot Wid. 6% is probably closer to the mark although with property investments going off the boil a little and fixed interest running poorly at present, you may see a few years of 4-5% depending on how equities go.

The info I got from Scottish Widows indicated that their With-Profits fund was 35% allocated to fixed interest and 10% to property, so as you say not too looking promising for the future.