Axa Endowment - What Should I Do ?

Dick_here

Hi all

Any thoughts welcomed...

18 year unit-linked endowment taken out with Axa in April 1997 (as a top-up), now no longer needed for the mortgage it was meant for.

Cost - originally just under £47 pm, was advised after 4 years to increase to just under £52 pm to prevent shortfall, and did so.

Sum assured and 'target amount' £15,300
Current projections:
@4% - shortfall of £1800
@6% - s/f of £100
@8% - profit of £1800
Their view is that 6% is a 'reasonable assumption' - I got an 'amber alert' letter in Jan 08.

The investment is 50/50 split between UK Equities and Higher Income funds.
Current surrender value is £6900.

Higher Income fund has done slightly better, and I am free to switch funds.

So I've got 7 years to go at £52pm, to get back an extra £8000, hopefully.

As I don't need this for mortgage purposes now, should I:
a) continue as is (are these decent funds basically?)
b) surrender right now
c) switch funds, suggestions welcomed !
d) make paid-up, I assume I can do this and the units I've got will hopefully go up in value until maturity but I'll save £52 pm.

Thanks guys!

EdInvestor

An endowment is an obsolete tax wrapper which usually has higher charges than a modern unit linked ISA. Endowment gains are subject to 20% life company corporation tax, whereas ISA gains are tax free. There are additional deductions for life cover which may now be unnecessary. Often there is a poor choice of funds to invest the money in.

Thus, if using an endowment wrapper for investment purposes, in most cases you would be better to surrender and reinvest the money in a stocks and shares ISA which will be cheaper, tax free, and have access to better funds.

Dick_here

Thanks, Ed. I'm aware that endowments in general aren't great, but can you be more specific on the merits - or otherwise - of my one ?

EdInvestor

You can check out the funds here:

https://www.citywire.co.uk/Funds/Home.aspx ( choose ABI funds) to see how they rate compared with the competition.You could try comparing the perfotrmance of the income fund with the Invesco Perpetual High Income fund, which would be available in an ISA. (it comes under "IMA funds" in the Equity Income category.) or is it a bond fund?

If moving to an ISA be sure to use a discount broker who rebates charges, such as https://www.h-l.co.uk. If you are looking at investing in funds in a tax wrapper, what you need is an ISA not an endowment - it's quite simple really.

Dick_here

Thanks again.

Ironically, I had my annual update in the post today - at 5th March the Plan Total value was £7091.52, so an increase of £200 in a year when I've paid in £620. But that was a bad year for the stock markets of course, admittedly.

I'm still unsure what to do to be honest.

dunstonh

An endowment is an obsolete tax wrapper which usually has higher charges than a modern unit linked ISA.

you cannot really say that as it is technically incorrect. Friends Provident endowments, for example, have an annual management charge of 0.7%. The charges were often heavy in the early years but lighter in the later years. We cannot go back in time and change those early years but only look forward from where we are now and going forward you will have some cheap and some expensive endowments.

Endowment gains are subject to 20% life company corporation tax, whereas ISA gains are tax free.

Not strictly true either. Both benefit from the tax credit on dividends. Whilst the ISA is better on capital gains front the difference will often range from about 0.4-1.2% p.a depending on the asset spread of the funds used.

!!!!!!, is there a surrender penalty (difference between current value and surrender value)?

The funds you mention certainly have the potential for 8%

dweeby

!!!!!!_here wrote: »

Ironically, I had my annual update in the post today - at 5th March the Plan Total value was £7091.52, so an increase of £200 in a year when I've paid in £620. But that was a bad year for the stock markets of course, admittedly.

I also have a unit linked endowment, mine's due to mature in 2012 and currently has a shortfall. We managed to pay off our mortgage 2-3 years ago, and like you - don't need it for the mortgage it was intended for.

The unit price of our (Scottish Widows (ex-Lloyds-TSB)) plan has stayed flat over the last 12 months, so (again like yours) has gained nothing.

So far, we've just continued the payments into it and will use the lump sum to reduce a mortgage we're just taking out. But, also like you - I question whether or not to leave it where it is.

When I get around to it (and we're currently packing to move house), I'm going to check all the terms and conditions given to me when I took the endowment out. People speak of over 100% allocation in the final years, but I don't know if our plan has this. Also, I'm not sure of any other penalties or charges if I cash ours in. And (so far) I haven't been bothered to get off my rear and do anything about it - probably to my cost.

The unit linked endowments don't have any final "profits" or anything, but I don't know if there is a final bonus of any type or any penalty for early redemption.

The sawdust is burning (there's smoke coming out of my ears!).

PS. I also read about people selling their plans, but you can't do it with unit linked plans (probably means no end bonus).

PPS. Details of mine here.

dunstonh

The unit price of our (Scottish Widows (ex-Lloyds-TSB)) plan has stayed flat over the last 12 months, so (again like yours) has gained nothing.

Some of the old LTSB (mainly Black horse life) endowments are quite good. They have access to funds which have good potential and have been doing very well. Indeed, I have some old BHL ones on my books which are well into surplus positions. If you are in the bog standard managed fund though I wouldnt be so confident. However, its never too late to address that (well it is if your maturity is due).

The unit price of our (Scottish Widows (ex-Lloyds-TSB)) plan has stayed flat over the last 12 months, so (again like yours) has gained nothing.

2007 wasnt a good year for investments unless you looked at the higher risk stuff.

When I get around to it (and we're currently packing to move house), I'm going to check all the terms and conditions given to me when I took the endowment out. People speak of over 100% allocation in the final years, but I don't know if our plan has this. Also, I'm not sure of any other penalties or charges if I cash ours in. And (so far) I haven't been bothered to get off my rear and do anything about it - probably to my cost.

Some of the old BHL ones did get an increased allocation in later years.

The unit linked endowments don't have any final "profits" or anything, but I don't know if there is a final bonus of any type or any penalty for early redemption.

No bonuses, they have a daily value.

Dick_here

dunstonh wrote: »

!!!!!!, is there a surrender penalty (difference between current value and surrender value)?

The funds you mention certainly have the potential for 8%

Thanks dunston.

I'm not aware of a surrender penalty, where would that be written down if there is one ? Are you implying that is there is no penalty I should surrender, or at least, if it was your policy, you would surrender ? Is the surrender penalty likely to be that significant though, if it does exist ?

Is the 8% potential worthy of holding onto then ?

Lots of questions, sorry. I guess I feel that my £52pm doesn't seem to be getting me much. Which is why I wondered about the paid-up policy approach, my units could still grow, hopefully, but I'd not still be paying monthly. Is that not a good approach ?

Dick_here

EdInvestor wrote: »

You can check out the funds here:

www.citywire.co.uk/Funds/Home.aspx ( choose ABI funds) to see how they rate compared with the competition.You could try comparing the perfotrmance of the income fund with the Invesco Perpetual High Income fund, which would be available in an ISA. (it comes under "IMA funds" in the Equity Income category.) or is it a bond fund?

Sorry, but how do I 'choose ABI funds' on that website ???

dunstonh

I'm not aware of a surrender penalty, where would that be written down if there is one ?

Some statements make it clear. Others do not. If it isnt clear you need to ask for the current value and the surrender value. If they are the same, then no penalty exists.

Are you implying that is there is no penalty I should surrender, or at least, if it was your policy, you would surrender ?

If there is no penalty to get out and you dont need the life cover then stocks and share ISAs are more tax efficient. If there is a penalty then this has to be taken into account.

Is the surrender penalty likely to be that significant though, if it does exist ?

They can be. Often many thousands of pounds.

Which is why I wondered about the paid-up policy approach, my units could still grow, hopefully, but I'd not still be paying monthly. Is that not a good approach ?

Paid up can be useful if there is a surrender penalty currently but wont be after x number of years. You can sit it out until no penalty and then withdraw at that point.