Why are with profits endowments 'outdated' ?

Dick_here

We read that they are, here and elsewhere, but why ?

They seem to me to offer stability, and once bonuses are added they cannot be taken away.

With unit-linked policies you're completely at the whim of the market on the day it matures, the policies could be going great the previous year but drop considerably just prior to maturity.

So why are with profits policies so seemingly hated these days ? I don't get it, am I missing something ?

UK007BullDog

It was the way they were sold as 100% safe fool proof way to pay off the mortgage plus have a little extra for spending like a luxury holiday.....

But as with all investments they can go up as well as down.....

Only if you died you would get the full amount. It was not guaranteed to pay off the mortgage and that put a lot of people in difficulty when they retired and found their endowments would not be enough to pay off the mortgage as some bonuses never materialised, so where not added, fund did not grow enough to make up the missed bonus.......

Dick_here

I understand that.

But if you don't need it for mortgage purposes, why does everyone seem so keen on telling us to surrender them anyway ? Surely surrendering should be the last option only, not the first.

EdInvestor

!!!!!!_here wrote: »

We read that they are, here and elsewhere, but why ?
They seem to me to offer stability, and once bonuses are added they cannot be taken away.

This was actually a bit of an illusion, as by the 1990s, at least half or more of the value of the endowment was in the terminal bonus which could be taken away.

Most WP endowments were invested around 75% in the stockmarket, with anouther 20% in property and bonds, so they were very similar in risk terms to unit linked endowments: they had to be in order to generate the returns required to pay off the mortgages and provide a cash lump.

As a result they were a lot riskier than most people thought.In 2003, the FSA belatedly realised this ( following an inquiry into the fall of Equitable life) and forced the insurers to reserve for all their guaranteed sums assured and declared bonuses in bonds and cash, so they really were guaranteed.

Unfortunately this immediately cut the returns of the WP fund drastically at many firms, meaning the endowments could no longer pay off the mortgages.Effectively WP endowments purported to offer a free lunch: guaranteed high returns with little risk.Eventually this was exposed as the sham it had been all along.

In addition many endowments have high charges, and gains attract 20% tax.If you want to invest, you are much better off with modern low charge funds in a tax free ISA, reducing risk through asset allocation, rather than expensive but flaky guarantees.

And if you just want to buy a home you are better off with an ordinary mortgage either repayment,offset or interest only, which you overpay.

Dick_here

EdInvestor wrote: »

This was actually a bit of an illusion, as by the 1990s, at least half or more of the value of the endowment was in the terminal bonus which could be taken away.

Not actually 'taken away', it just was added - or not - at the end of the term.

How can this be worse than a unit linked investment though, where all of your policy's value could potentially disappear just before maturity ?

And if you just want to buy a home you are better off with an ordinary mortgage either repayment,offset or interest only, which you overpay.

Yes, I agree with that for new mortgages of course.

What I'm still not clear on though is why a policy that has some of its profits added - and guaranteed - each year can possibly be called worse than one where its value can go up or down - potentially significantly - each and every day.

I've got one of each and if I were to surrender, which one should I and why ? Common sense tells me to hang onto the one with added bonuses to date that cannot be taken away, i.e. with profits, not unit linked. Is that not sensible ?

Trying_to_be_good

It depends what rate the bonuses are being added at - if it's less than inflation, and no terminal bonus (as has been the case recently) it makes no sense to hold on to them, let alone pay any more money in.

dunstonh

It should be noted that with profits funds used to quadruple your money over 10 years and fell back over to time to triple and double. People used to make a lot of money on these plans. You need to remember that investments like unit trusts just weren't available to the general public in the mainstream. You cannot compare what is available today with the past.

With Profits plans did attempt to modernise with the introduction of unitised with profits funds and these have generally been a bit better and a couple are actually quite good. Although when I say couple I really mean a couple. The idea behind with profits wont go away. The consumer still has a desire for a smoothed product. However, implementation of this is not that easy.

EdInvestor

!!!!!!_here wrote: »

Not actually 'taken away', it just was added - or not - at the end of the term.

TB is actually credited to policies regularly: if you surrender a policy before maturity the surrender value will contain the amount of TB it has earned so far.

How can this be worse than a unit linked investment though, where all of your policy's value could potentially disappear just before maturity ?

Not really.A very substantial correction, as we've just had, is unlikely to reduce the value by more than 15-20%.And if you are worried about that you can always swiutch the money out of the stockmarket linked fund and into the cash fund in the run-up to maturity.

What I'm still not clear on though is why a policy that has some of its profits added - and guaranteed - each year can possibly be called worse than one where its value can go up or down - potentially significantly - each and every day.

The guaranteed profits added on many endowments these days are negligible, and in others no terminal bonus is added , because the funds are all invested in bonds, thus earning virtually no returns after tax, charges and the cost of life cover.

Endowments MUST be mainly invested in equities if they are to perform, and these days this is not allowed.Ergo, the policies can't perform and in most cases should be dumped.

Dick_here

Thanks for the expertise. So you think it's better to keep a unit linked endowment than a with profits one ?

UK007BullDog

You want us to give you a definate answer as you are thinking of cashing one in. But it would be better for you to get professional advice. Dont want you to make the wrong choice.

Dick_here

My instinct and preference is to keep them both going unless/until I really, really need the money. What I'm after is opinions as to whether that's the right approach, and which one should go first if one ever has to.

If I can keep paying them until maturity, should I or not ?