Value of with profits endowment policy

RG2015

I have a with-profits endowment policy which matures in August after 40 years. I have a current surrender value which is significantly higher than the guaranteed sum and regular bonuses to date.

My provider says that the surrender value can fall although the bonuses tend to accelerate towards the maturity date. They also said that the policy was likely to be more property than equity based and hence better protected against equity swings. The customer services person advised that they were unable to advise the spread of my policy as it was so old.

Given the current financial crisis can anyone advise if there is a risk that the value at maturity may be significantly reduced from the current surrender value. What I can say is that the surrender value has increased by 1% in the 6 weeks since 30th January compared with the FTSE 100 which has fallen by 29% during the same period.

masonic

It really depends on the specifics of the policy itself. Do you have some sort of prospectus or factsheet explaining exactly how it works? It's quite concerning the provider doesn't seem to know how it is invested. Someone is surely managing the portfolio, it's not as though it's been set up and completely left alone for 40 years.

RG2015

Thanks @masonic, I asked and the customer services person said oh yes, it is being managed. As ever though, customer services staff don't always have the information and one assumes someone knows the answer. Perhaps I should have pushed a bit on this and of course can still do this.

masonic

In theory the policy should be managed so as to smooth out the gyrations of the stockmarket, and would probably be lifestyled to reduce exposure to those riskier assets in the years to maturity, but I think it is reasonable to insist on some specifics being shared with you. What you will probably find is that some of the 'profits' that were being held back and could have been paid at maturity will now be diverted into making up any losses suffered by the underlying investments.

Old_Lifer

Given the age of the policy and  from your post  it is a conventional  with-profits endowment.

I have to go out shortly but may  I refer you to two of my very first posts which describe how a conventional endowment works.

If you  click on my username ,  click on  'replies'   and then click on  'more comments' at the foot of the page (about 10 times) you will find my posts of 5th  and  6th March 2019  (thread title  'Life Assurance Endowment' )  which describe how a conventional with-profits endowment works.

I hope to get back to you later regarding your query.

Old_Lifer

I assume by now that you have read my earlier posts so have some idea of how a conventional wth-profits endowment works.

Since the policy only becomes payable at the end of the term or on death within the term,  if you terminate the policy early you will only receive the current surrender value of the policy.  As you have been told, the underlying basis on which the surrender value is calculated may change from time to time  but overall  the surrender value will increase ever more rapidly as the policy gets towards the end of the term at which point the various part that make-up the policy become payable in full.

In normal circumstances,  if you have a conventional policy which is due to mature in the next few months or even in the coming year ,    it is not that difficult to calculate for yourself a rough indication of the likely payout.  To do this you would need to know the current rate of terminal bonus (payable on death or maturity )  applicable to your policy.  This may be shown  on your latest annual bonus statement  but not all Life Officies show this nowadays. The terminal bonus is usually a percentage of the annual bonuses attaching to the policy, so it is simply a matter of multiplying that figure by the total bonuses  shown on your latest annual statement (sometimes the terminal bonus is expressed as a percentage of  sum assured & bonuses combined).

At  maturity you will receive :    sum assured  +  total bonuses on latest annual statement  +  terminal bonus

A small amount of interim bonus is added to bridge the gap between the last bonus declaration and the date of maturity.

The rate of terminal bonus could be adjusted up or down by the time your policy matures which is why I have said it is only a rough indication of the likely payout.

Of course these are not  normal circumstances   and we have had large  stockmarket falls in the last week  albeit with some limited.upward movement.  The experts seem to tell us that Corona will peak in 2 months, 3 months,  (who knows?).  Stock markets hate uncertainty  so we will probably not get more stable  markets until after the peak has passed.   Life Officies often do not alter terminal bonus rates immediately after a big market fall,  as there is often  some sort of bounce back not long afterwards.  Nonetheless  there is clearly a very real risk of  a cut in terminal bonus rates before your policy matures.

Life Officies have tended to reduce the percentage  of equities in their with-profits funds over the years  and a typical with-profits fund may have only half or less,   invested in the stock market.  This means that a large fall in the stock market  may  eventually result in a much smaller percentage cut in the terminal bonus.

If you can obtain the current rate of terminal bonus applicable to your policy and if you decide to have a go at working-out a rough indication of the possible payout may  I suggest that you  use only three-quarters of the current rate of terminal bonus in your calculations so that you do not have an overly  optimistic view of the possible payout.

RG2015

@Old_Lifer, Thank you so much for your posts here and on the other thread. I will read, digest and re-read these along with any other information my research and conversations unearth.

These are unusual times so history may not be the best indicator. Do I take a guaranteed sum now and risk losing a potential increase over the next 5 months, or do I risk losing some of this by waiting?

masonic

RG2015 said:

These are unusual times so history may not be the best indicator. Do I take a guaranteed sum now and risk losing a potential increase over the next 5 months, or do I risk losing some of this by waiting?

In my view there is very little risk of ending up with less than the current guaranteed sum, and a likelihood of ending up with more. At the present time, I don't think you're going to find a better place for the money.

RG2015

masonic said:

In theory the policy should be managed so as to smooth out the gyrations of the stockmarket, and would probably be lifestyled to reduce exposure to those riskier assets in the years to maturity, but I think it is reasonable to insist on some specifics being shared with you. What you will probably find is that some of the 'profits' that were being held back and could have been paid at maturity will now be diverted into making up any losses suffered by the underlying investments.

The customer services person said he did not have any details but I have just seen that my last bonus notice directed me to their website for more details.
withprofitsfunds.co.uk

RG2015

I have read up on this on the Aviva website and I have seen  the following note on Final Bonuses for my type of policy.

Final bonus aims to pay any balance between the regular bonus we have already added and the performance of the Sub-Fund over the whole period of your investment. This makes sure that you get a fair share of the return your investment has earned. Bonuses can vary and are not guaranteed.

I am encouraged by the link to the whole period (ie 40 years) although the final caveat gives them a get out. Could a financial melt down give them cause to apply it? As I write this I can see my aversion to risk is bordering on paranoia.  

 

masonic

RG2015 said:

I am encouraged by the link to the whole period (ie 40 years) although the final caveat gives them a get out. Could a financial melt down give them cause to apply it? As I write this I can see my aversion to risk is bordering on paranoia.  

Indeed it is

The disclaimer is accurate. You have received regular bonuses over the investment period. These will typically be quite a bit less than the performance of the underlying investments, just in case there is a massive depression in the later years of your policy. Theoretically they might not be in a position to pay any final bonus, in which case you'd end up with a value equivalent to the surrender value today. But that is unlikely.

You can perhaps reassure yourself that if things get bad enough, money might no longer have any real value, so the final value of your policy would be inconsequential.