Eagle Star Low Cost Mortgage - Hold or quit?

hoof

Started Eagle Star (now part of Zurich group) Low Cost policy in 1990 that matures in 2015. Initial expectation was for maturity value of £65k. Following the recently declared bonuses, minimal again, I requested some information on the policy and have been advised of following:

Cash in Value now £20,560
Estimated maturity vale, at 3% investment growth, £50,200 or £58,100 at 5%
If policy made paid up then maturity vlaue £22,500 at 3%, £23,100 at 5%.

From the above it seems that best option would be to cash in the policy and invest the proceeds and pay existing premiums into alternative savings option until maturity:

£20,560 Cash in Value
£26,082 Existing premiums until maturity 126 x £207

£46,642 Maturity savings before interest
Interest at 3%pa on above until maturity sbould be at least 11k giving nearly £58k - Zurichs extimate at 5% growth!!

The paid up option looks very bad value - it should be possible ti invest the £20,560 and grow it, over a 10 year period, to more than the £23k quoted.....

Am I missing any tax implications - my understanding is that proceeds would be tax free if policy held until maturity. Would any tax be payable on the £20,560 if I take the cash now?

Advice on above would be greatly appreciated, particularly if I have overlooked something etc....



many thanks

EdInvestor

Hi hoof

There should be no tax implications with a surrender after 10 years.

From the above it seems that best option would be to cash in the policy and invest the proceeds and pay existing premiums into alternative savings option until maturity:

On the assumption that this is a unit linked (not With profits) policy and that you have already remortgaged to repayment, then yes, that's what I'd do.

If you haven't yet remortgaged, you might be better to apply the proceeds to reducing the capital of the mortgage and the premiums to increasing the monthly mortgage payments, due to the higher net "saving" created by avoiding savings tax.

dunstonh

Eagle star have a very good property fund. Have made use of it a number of times over the years. May be worth a check to see if its available to you.

hoof

Thanks for confirmation re tax position. The policy is a with profits one, not unit linked - does this alter your view?
thanks

hoof

Having read some of the other threads on endowments, am I right in thinking that the projected maturity values advised to me exclude any potential terminal bonus? If this is the case then how on earth are you expected to make an informed decision on what to do? How do you obtain a view on the potential terminal bonus you may be foregoing by surrendering the policy?
Advice most appreciated.

dunstonh

Having read some of the other threads on endowments, am I right in thinking that the projected maturity values advised to me exclude any potential terminal bonus?

Correct.

If this is the case then how on earth are you expected to make an informed decision on what to do?

You can ask the provider for the amount of terminal bonus already on the plan. You can then seek professional advice to find out what the opinion is on the future potential of that provider. Some providers will give it to you, some require an IFA to ask for it (most notable of these is Standard Life).

The projection method for unit linked endowments isn't too bad. It only fails when there is an increased allocation later in the plan. The projection method for with profits endowments is flawed significantly. It doesn't include any terminal bonus and as many WP endowments can't actually give a current value, some providers use the surrender value to project from which, again, lowers the real value (conventional with profits plans were never intended to work with a current value so the systems didn't need to calculate one)

A good example of the flawed process is one I came across a couple of weeks ago. The client had a red projection letter showed a shortfall of about £5000. They had kept all paperwork and had obtained the surrender values. The target growth rate at inception was 6%p.a. (which is quite good). They were a couple of months past the 10 year mark. The surrender value now was significantly higher than the surrender value on the original illustration at the same point. That illustration showed the figures required to be on track. So we have one thing saying that the endowment is on track for surplus and another saying it has a £5000 shortfall.

Its a crazy situation but it has led to people surrendering perfectly good endowments.

EdInvestor

At the same time however it should be mentioned that more than half of the WP funds out there are now closed to new businsess and heavily invested in bonds, and with all terminal bonuses gone.

The reason the FSA wants firms to ignore TBs in projections is because in many (most?) cases, these unguaranteed bonuses will have disappeared by maturity.To include them would give a misleading impression.At some firms, TBs may survive (eg the Pru and some of the smaller mutuals.Perhaps at NU in some cases - not all.).

As of last year, the average TB on 10 year maturing policies was 3%, on 15 year 9.7%, on 20 years 17% and on 25 years 34%.The trend is still downwards.Standard Life, one of the biggest providers, expects terminal bonuses to be completely phased out by next year.:(

Hoof,

If you post the Guaranteed sum assured, total bonuses, monthly premium and maturity date we can have a closer look.

hoof

Editor,
many thanks for the thorough explanations. The latest information advised to me on 31 May 2005 is as follows:
Guaranteed minimum death benefit : £65,000
Basic sum assured £37,383
Total Reversionary bonus £6,880.95
Monthly premium £207.40
Plan Start date 4/12/90
Maturity date 4/12/15
Looking forward to hearing your view.

Hoof

dunstonh

At the same time however it should be mentioned that more than half of the WP funds out there are now closed to new businsess and heavily invested in bonds, and with all terminal bonuses gone.

Not all the closed funds are bad. A number of closed funds are performing better since they closed than before.

The reason the FSA wants firms to ignore TBs in projections is because in many (most?) cases, these unguaranteed bonuses will have disappeared by maturity.To include them would give a misleading impression.At some firms, TBs may survive (eg the Pru and some of the smaller mutuals.Perhaps at NU in some cases - not all.).

This is Editors view and is not shared by a number of us on the board. Terminal bonuses are beginning to increase again and the expectation is that terminal bonuses will continue to grow. It will be the annual bonuses that remain low as they cannot be clawed back by the insurer when things go bad.

If the FSA wanted to ignore terminal bonuses, they should totally ignore unit linked plans as they are more volatile potentially. Someone could see a drop of 25% in their last year on a unit linked plan in the same way a TB could be reduced.

Standard Life, one of the biggest providers, expects terminal bonuses to be completely phased out by next year.

I have seen no such article or announcement to this effect. As I have a number of clients with Standard Life who have seen an increase in their terminal bonuses over the last 12 months, I would appreciate a link to some information on this as they appear to be doing the reverse of what you are saying.

EdInvestor

Hi hoof

If you took the surrender value and invested it at 3.5% also paying in the premiums for the period up to maturity you should get 58,692. That's compared with the absolute minimum guaranteed value at maturity of 44,264.

Unless you desperately need the life assurance I can't see much point in holding onto this one. As a final check I would suggest you see if you can find out how the Eagle Star With profits fund is invested. What percentage in equities and properties? If low,no point in staying IMHO.

These WP products have high charges and expensive guarantees and they don't really work any more in today's low inflation/ low market returns environment.The addition of much tougher regulation (following the Equitable disaster) means the companies must reserve in bonds for guarantees and will now charge you for that too, making it even less likely they will hit their targets.

With profits has had its day at all but a few companies IMHO, and ES was never going to be one of the surviving providers.

I do appreciate the problems that the complete lack of clarity over bonuses is causing for IFAs. Effectively they can't advise on endowments, because they could easily be suggesting a course of action which could lead you to lose money, and then make a complaint about them.The fact is, nobody knows what will happen, it's a matter of judgment.

But to my mind most people do prefer certainty when it comes to their mortgage.Where a conservative calculation of the return from the money on offer if placed on deposit gives a clear cut advantage over the guaranteed value of the endowment, then it makes sense to me that people should get going on using the money to reduce their shortfall.

Rather then keep on taking risks (which many of them were tricked into taking in the first place) with the endowment, which could cause the shortfall to get even bigger.

dunstonh

With profits has had its day at all but a few companies IMHO, and ES was never going to be one of the surviving providers.

I still on occassion do single premium with profits invesments. Current annual returns are running at 6-10% net. 10 year performance is still above what a balanced managed fund has done. With profits hasnt had its day. You just need to be more selective than before. It is still right for the right person rather than being the one size fits all solution it was years ago.