Whether or not to cash in endowment policy

AlanFAlanF Forumite
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I hope this isn't repeating previous posts, but can't fnd anything similar.
I was sold an endowment in 1995 to cover a mortgage. It wasn't a smart idea, but I think 1995 was long ago enough that I couldn't claim to have been mis-sold. I'm sure I was advised all the stuff about no guarantees, etc.

My question now is whether I should sell it. It is underperforming and so far after 10 years of 20 is worth less than the cash I have paid into it. I don't need it for the mortgage any more - paid off.

I have projections for it's final value based on the usual 4%, 6%, etc. However, I would like to compare this against the likely outcome of the same sum of money invested in a bank at the same interest rate, but calculating interest expected from money paid in monthly and then compounded is beyong my maths.

Is there any neutral source of standard advice about such things. I can afford to keep paying, or to stop paying and freeze, or to sell. I don't need to release the cash at present.

Thanks

Alan

Replies

  • This site has a handy calculator which will do the compound interest sums for you.

    www.orchardindependent.co.uk/online-calculators.html

    (I have no links with it other than finding the calculator useful)
  • Hi Alan

    Post the folloing info so we can take a look, as there may be other aspects that should be taken into account:

    Company it's with
    Guaranteed sum assured
    Surrender value
    Monthly premium
    Maturity date
    Trying to keep it simple...;)
  • AlanFAlanF Forumite
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    Thanks:
    With Norwich Union Low Start Homemaker, started life as a Commercial Union Low Start LCE

    Value on death £100,000

    Minimum life insurance amount (as of Nov 04) £43,900

    Monthly payment £271.32

    Plan Start 6.11.95

    Plan Maturity 6.11.15

    Current surrender value £19,705.41

    Thanks to sleepless for the link, which has enabled me to do the sums I wanted. Based on NU's figures, at 4% growth my projected final amount would be £71300. Using the calculator, the monthly fee invested for 10.5 yrs would get me around £42540 (not sure if this allows for deduction of income tax from the interest). Added to my surrender value, (which using the same Orchard calculator would be worth £29,969 after 10.5 yrs of 4%) this would only get around £72509 - actually slightly more than the projected final amount.

    However, I have a feeling that the Orchard figures are probably gross of income tax, and that the projected final amount of my endowment is tax free, in which case I may be better to leave the endowment running.

    Any thoughts?
  • Hi Alan

    If you cashed it in and put the surrender value and the monthly premiums into the bank, getting a 4% net return, you would end up with 72,095 according to the calculator I use, much the same as the estimated maturity value.

    The "value" in the policy is effectively the "free" life insurance.

    If you don't need the insurance, you might want to consider whether 4% is a respectable return for taking stockmarket risk.Personally, I'd want more, if I thought I could comfortably get 4% net over the period without taking any risk.

    P.S. I am assuming this is a unitised With-profits endowment policy, with no guaranteed sum assured or declared bonuses. If however it is a unit-linked policy, post what fund it is invested in, as it may be possible to improve the likely eventual return by switching to a better performing fund.
    Trying to keep it simple...;)
  • dunstonhdunstonh Forumite
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    Also a hint in the name. "low start" policies cost more over the term than level policies. You may find the charges on this plan too high to consider continuing.

    You also look at target growth rate and ongoing charges. Both of these are going to have an impact on whether you should keep it or not. For example, there are plans that increase your allocation (contribution) after 10 years and all the charges are front loaded. This means once you get to year 10, you benefit from a cheap investment from then on and can get upto 105% before you even start.

    Also, there may be the option to invest in alternative funds. A more appropriate fund spread may be the better option than just "keep it" or "surrender it". (as suggested by editor).
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • AlanFAlanF Forumite
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    Difficult to tell much more about the account. My 4% was obviously based on the various scenarios given by Norwich Union. If investments grow at 6%, then my final amount will be 84K, and if 8%, 100K. However, one assumes that interest rates if I take the money out and stick it somewhere safer, may also rise proportionally.

    The schedule doesn't say much about the policy. The basic sum assured is £43,900 with participation in profits. The mortgage sum assured is 100K, whatever the difference betwoeen thses two is. The recent accompanying letter from NU tells me it is a with-profits fund, and their projecte figures include both annual and final bonuses.

    I think I will probably leave it. Not interested in taking risks with it, but obviously if taking the money out and putting it somewhere safe was going to be as good or better than their conservative 4% investment, I would reconsider.

    What interest rates could I currently expect to get if investing over £50K in a perfectly safe account?
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