Endowment Final Bonus

Bob_8472

I’ve an Endowment with 12 months to run. I’ve just had a projection of what I’ll get plus a “supplemental statement “ which shows a current surrender value which is about £3,000 higher than the projected value for next year. The difference is due to the level of final bonus that applies. The projection seems to use 3 FSA mandated growth projections but the current value on the supplemental statement is higher than all of them!

I’m going to phone them to ask about it, but is it really likely the final bonus won’t end up being better than it is now (obviously I know that stock market performance could affect this - I’m trying to get a general feel for how the final bonus works as no explanation has been given) ?

Old_Lifer

Projections are just  assumptions,  assuming  the policy  grows at any of the given rates.

 

The surrender value is the current  cash-in value of the policy.

Policy documentation often says something like   'we may pay a final bonus at the end of the term or on death within the term'  with no mention of paying one at any other time.     It is not guaranteed and can be altered  or even withdrawn at any time.     In practice most Life Officies set final bonus rates  at  the year end  and  apply the new rates in the coming year.   The same rates may be in force for  months  and sometimes for the whole of the year.   

Each class of with-profits policy will have  its own range of final bonus rates.   The longer the term of the  policy,  the higher the rate of final bonus at maturity      For instance,  at maturity a 25 year policy will have a higher rate of  final  bonus than a 20 year policy.    When overall rates of final bonus are adjusted up or down,  these differentials are maintained.

If you surrender your policy ,  the surrender value will include the surrender value of the current final bonus which would be applicable  if death occured at that point.

The risk you face is that final bonus rates could be reduced before maturity  but as nowadays,  only around half of a typical with-profits fund  is invested on the stock market,  any reduction would likely  be less than the headline rate of stockmarket fall.

Since  final  bonus rates are not guaranteed and may alter,  it may perhaps be prudent to exclude the final bonus  in  projections  but modern-day projections  are not my area of knowledge.

dunstonh

The projection seems to use 3 FSA mandated growth projections but the current value on the supplemental statement is higher than all of them!

As mentioned, projections are just synthetic examples.  Some providers are unable to project from the current position but will project from the surrender value instead. Or they will project from the current value excluding final bonus.  

I have seen projections that are lower than the guaranteed minimum maturity value because of these flaws.

Bob_8472

Thanks for both answers, that’s helped me understand it. 

This is an Aviva 25 year endowment and pays a whopping final bonus of 70% or so of the current value ( I now find). What I’m still not sure about is whether my final bonus, if I cash in now at 24 years , will it be calculated in the same way as if I wait another year?

obviously over the next 12 months I will be paying in premiums and the asset values could fluctuate and Aviva could change its final bonus rates, but if we ignore those factors, do I get the full bonus now or is it at a lower level because it’s not reached maturity yet?

I’ll phone Aviva this week to see if I can find out the answer.

dunstonh

A lot of Aviva plans (ex Norwich Union versions, not ex Friends Provident or AXA) also have an endowment promise which can add a further amount on top on maturity as well.  You can see this figure on the 2001 statement (and I think 2003 as well).  IFAs can access that information on your policy if you have an IFA.   Or you can ask Aviva yourself if there is a mortgage endowment promise and how much.  However, the font line call centre staff, in my experience, wouldn't know what you are talking about and you would need someone more experienced to tell you.

Old_Lifer

The rate of final bonus  depends upon the length of time the policy has participated in the profits of the Life Office,  the longer the better,   so a 25 year policy will receive  at maturity a slightly higher rate of final bonus than a 24 year policy. 

If you surrender now,  the final bonus will be based on a policy which has been in force for 24 years  but as the final bonus  only becomes payable at the end of the term or on death within the term   you will receive the surrender value of that bonus.

Assuming there is no change in final bonus rates before your policy matures, you should receive more final bonus by waiting until maturity.