Cash in 1 year early?

HePa

I have 1 year left to pay in on my endowment policy.  This year my yearly statement showed that I paid in £1200, however after fees the growth was only £300, so I made a loss. If the fees are the same next year and growth hasn't continued (due to Covid) I may make a loss again.  If I cash in now I loose the last 3 years bonuses, which I am told will be around £800.   Is it worth me cashing it in now one year early to pay a chunk off my mortgage, and therefore pay less interest on the mortgage?

MattMattMattUK

You need to calculate what the cost of the interest is on the mortgage and what you would lose. It also depends on what kind of policy it is, there is a reasonable likelihood that the stock market will rise over the next year, so if it is stocks and shares based it may well rise significantly, alternatively Brexit may plunge us into an even worse recession and the stock market might plummet. 

HePa

Hi  Thanks.  Its 100%  invested in RLL Managed fund.  I don't know what that means though.  ?

dunstonh

This year my yearly statement showed that I paid in £1200, however after fees the growth was only £300, so I made a loss. 

Much as it would have done in a number of years previously.   Nothing unusual in that.

 If the fees are the same next year and growth hasn't continued (due to Covid) I may make a loss again.

What makes you think there isn't growth due to Covid?   The markets fell between Feb and March of this year but have since gone on to recover in get back to surplus positions in most stockmarkets except the UK.  The UK is down mainly due CV and the closeness we are to a no deal scenario,  The US is massively up due to tech companies.   So, its not all doom and gloom.   Chances are you are not 100% equity either.   The fixed interest securities side, in particular gilts, has gone up this year.

  If I cash in now I loose the last 3 years bonuses, which I am told will be around £800.

That is a very unusual surrender penalty.   It is normal to suffer some penalty but I dont think I have ever seen a provider say they will remove three years of bonuses.   Normally it is expressed an explicit cost (usually based on a percentage).

 Is it worth me cashing it in now one year early to pay a chunk off my mortgage, and therefore pay less interest on the mortgage?

Insufficient information to go on.

However, it seems unlikely as you would be losing £800.   And you will be losing three years of growth.       Negative years happen fairly regularly but two negative years in a row are very unusual (about 5 times since 1980) and three negative years in a row has only happened once in 50 years.  You could get unlucky but statistically, it is unlikely.  So, that bit is a judgement call.   If your endowment has an MEP that will be lost as well. Aviva and Phoenix (ex Pearl) operate those and they can be worth thousands.

Old_Lifer

If your policy has annual bonuses as you say (and not units or bonus units added)  it is a conventional endowment   .In that case the policy will only payout in full at the end of the term or on death within the term.   If you surrender the policy you will receive the current surrender value of the policy.

With a conventional policy the annual bonuses once added to the policy, are guaranteed and cannot  be taken away  but they are reversionary bonuses and are only payable when  the policy becomes payable    ie  at the end of the term or on death within the term.    If you surrender your policy before maturity you will  receive the surrender value of the annual  bonuses.

As the endowment sum assured and attaching bonuses are guaranteed at maturity, your only risk  is that the rate of terminal bonus may be reduced before the policy matures but  since  only around half of a typical with-profits fund is invested in the stock market nowadays,  any reduction in the rate of terminal bonus is likely to be less than any headline rate of decline in the stock market.

Old_Lifer

Having posted  and  scrolled back up the screen,  I see there are in fact no bonuses ,  as the policy is linked to a managed fund.

dunstonh

Old_Lifer said:

Having posted  and  scrolled back up the screen,  I see there are in fact no bonuses ,  as the policy is linked to a managed fund.

Same here.  I posted it before that post was made.  Which indicates that there is some confusion.  RL don't pay bonuses on their unit linked range.  So, this removal of three years worth of bonuses doesn't tie in with a plan that does not have bonuses.

The fund itself is not bad, as bog standard insurance company funds go.  Its up over 12 months but down slightly YTD.

Just think if the OP had made the decision to cash in after the 2018 drop. They would have missed on the 14.4% year that followed.  

HePa

Thanks.  Yes I see.    Just to clarify.  My bonus is paid every 3 years and the last 3 years bonuses are due to be paid to the policy at the end of next year (policy end date).  I was told by RL if I cash in now I will loose those 3 years bonus as they won't be credited until next year.
Thanks for everybody's comments.