Endowment what to do ?

dickymint_2

Hi I wonder if someone can give me some advice on my endowment policy, I started the policy in July 1986, it is a progressive build up plus plan 25years £25,000 endowment assurance with profits , with L & G. I don't know wether to cash it in or not I pay £63.60 @ month (£763.20 a year) and the new annual bonus each year for the last few years has been going down and down, this years was £230.20, so im losing £533 this year alone.The total +annual bonus is £23,864.20. L & G have given me a surrender value of £21,941.00 the maturity date is 25th July 2011 can someone please give me a bit of advice

dunstonh

and the new annual bonus each year for the last few years has been going down and down, this years was £230.20, so im losing £533 this year alone.

No you are not. You are forgetting the guaranteed sum assured that was on the plan from day 1. That is effectively paid for over the term. You are also forgetting the cost of life cover in there.

Your endowment appears to be on track at least and that is a good sign after a stockmarket crash and an anticipated period of growth. L&G are financially strong enough to be a with profits player and you should see improvements in the bonuses again in the coming years (subject to investment performance continuing to improve as it has been).

dickymint_2

what is the guaranteed sum assured is it (basic sum assured £13,050)

EdInvestor

HI dickymint

If you took the surrender value of 21,941 and paid it into an account @net 4% paying in the monthly premiums as well until maturity, you would have a total of 32,885.

You need to compare this with the guaranteed value, which is the minimum they will give you on maturity.This is made up of the basic sum assured (13,050) plus the total annual bonuses so far.

If the former is a lot higher than the latter, you may wish to surrender.
Bear in mind the cost of replacing the life cover if you need to, it will be more expensive as you are now older.

Also worth checking if there is any terminal bonus in the policy.If there is more than 20% ,this may be an indication to surrender as this money is not guaranteed and might disappear.

dickymint_2

Hi Editor
the figures i have from the last statment are
total existing bonus £10,584
new annual bonus £230.20
final bonus rate 59%
basic sum assured £13,050
total +annual bonus £23,864.20
sumassured % 0.75%
existing bonus % 1.25%

I have also paid my mortgage up, if i do cash the endowment in will i have to pay tax on it.

EdInvestor

dickymint wrote:

final bonus rate 59%
total +annual bonus £23,864.20
[/B]

The guaranteed rate is 23,864, see comparison above.

In addition that 59% final bonus is not guaranteed and could disappear.

You will not pay tax if you surrender this policy, which is what I would do, as you are only making 2% annual bonus returns and could find the total value including unguaranteed final bonus actually going down in future as "good years" drop out of the policy history to be replaced with "bad years".

If you need the life cover, replace it before surrendering.

dunstonh

I wouldnt be so hasty. The 59% final bonus is not guaranteed and would have dropped a fair bit after the stockmarket crash. However, final bonuses have bottomed out and we are seeing them increase again. You would be, in effect, paying into the endowment whilst the market was high and then pulling out after the crash.

L&G did offer a larger fund range on some of their endowments with the ability to switch. Rather than face a surrender penalty which you would probably never make up over the remaining term, you could ask if switching to alternative funds is an option on your endowment.

Look at the figures again. Surrender value is £21k. Guaranteed minimum is £23k. However current position is £23k plus 59% final bonus. If you surrender, you will be, in effect, kissing goodbye to over £2k in penalty and that 59% final bonus.

EdInvestor

Surrender value is £21k. Guaranteed minimum is £23k. However current position is £23k plus 59% final bonus. If you surrender, you will be, in effect, kissing goodbye to over £2k in penalty and that 59% final bonus.

The surrender value includes the vast majority of the final bonus.If you surrender now and put the S/V into a risk free deposit account @4% and pay in the premiums as well, you will get a pretty well guaranteed amount of nearly 33k (subject only to fluctuating interest rates) at maturity.

If you keep paying into the endowment you'll get a guaranteed amount of 23k - 10k less.You might still have terminal bonus in there.Maybe.My guess is that this will diminish.I suppose that it's very faintly possible that you might get more than 33k if you stuck with the endowment, but IMHO it's extremely unlikely.

There's no extra reward for risk in this investment as far as I can see.If you want a risk-based investment, there are far better ones around.

Rather than face a surrender penalty which you would probably never make up over the remaining term, you could ask if switching to alternative funds is an option on your endowment.

It's very likely you would still face the surrender penalty anyway if you did this switch, as the penalty relates more to leaving the With-profits fund, than the endowment itself. But this could be an option particularly if you need to retain the life cover.

Check this link for alternative L&G fund performance (scroll down)
http://www.trustnet.com/life/funds/perf.asp?txtS=&txtSS=&sort=3&page=14&ss=0&columns=&sec=all&status=all&def=1

As usual the property fund is a good performer, worth a look IMHO :)Past performance is no guarantee etc, but most insurers' property funds have produced stable returns in the 7-10%+ range for most of their history and such returns are not to be sniffed at these days.

Personally, I feel there are better ways to invest in the stockmarket than through insurance company funds, whereas it's quite difficult to get exposure to commercial property except via the life companies.Thus if you want to have a portion of your overall savings and investment money in property and already have an endowment or pension policy at a life company, then diverting the money (or a portion of it) into the property fund can often be a move worth considering.

dunstonh

If you keep paying into the endowment you'll get a guaranteed amount of 23k - 10k less.You might still have terminal bonus in there.Maybe.My guess is that this will diminish.I suppose that it's very faintly possible that you might get more than 33k if you stuck with the endowment, but IMHO it's extremely unlikely.

You say that you think it will diminish. However, all signs are that terminal bonuses are increasing again.

Premiums being paid now are going in after the stockmarket crash and over the term of the policy. Having a stockmarket crash during the early years of the plan can be very beneficial. Its when it occurs later in the plan life that it is not so good. In the short term following though, things will look bad.

Personally, I feel there are better ways to invest in the stockmarket than through insurance company funds, whereas it's quite difficult to get exposure to commercial property except via the life companies.

Lets not get product and funds mixed up. Life funds are not as tax efficient to basic rate taxpayers than OEICS/Unit trusts (although can be for higher rate tax payers). However, charges on these funds can often be a lot lower than unit trusts/oeics (although that again involves mixing up products and funds). They can also be more expensive depending on the provider.

In the case of the endowment, the bulk of the charges would have been in the early years. The contributions now contain a greater investment content then the first few years.

Sure, there are better alternatives if you were starting from scratch now. However, you have to consider that the charges have been paid already and the stockmarket crash has happened. Switching out of this would incur large costs and I disagree with you on this particular endowment.

My view is that you would lose more than you would gain. L&G are a strong company and terminal bonuses are increasing not declining. Stockmarket is growing again and it is anticipated that this will continue at around 7-8% a year. Yes, there is the risk of another crash but it is not expected at this time.

It's very likely you would still face the surrender penalty anyway if you did this switch, as the penalty relates more to leaving the With-profits fund, than the endowment itself. But this could be an option particularly if you need to retain the life cover.

Switching out of the WP fund totally would incur a penalty but it would not involve a penalty as high as surrendering. Redirecting future contributions into alternative funds will usually incur no charges (sometimes a nominal £10-£20 may apply).

dickymint_2

Hi Editor & dunstonh
I have been in touch with a few dealers to see what they can offer me if i sell, so far to date i have had two replies, both have said they are unable to make me an offer for the policy, still awaiting a few more.

!!!!!!

EdInvestor

I have been in touch with a few dealers to see what they can offer me if i sell, so far to date i have had two replies, both have said they are unable to make me an offer for the policy..

Not much worth holding on for there then. :rolleyes: