Red Alert letter from Standard Life - panic?

signofthetimes

Hi fellow moneysavers,
I apologise in advance to ask of you a variation of a question that has been asked in various posts, however have reached a bit of a crossroads with regard to what to do with our endowment.

Like many Standard Life customers have had an endowment update recently, again showing Red Alert status, which have put off for the last few years but as we are about to come off a fixed rate, and are looking at switching to tracker rate with our current lender, Woolwich (Barclays) plus taking stock of our finances in general, I am wondering whether we need to extend our mortgage to include the likely shortfall.

Our mortgage (part and part) is currently 72,000 (house price £195,000), ending in 2016. The endowment was planned to pay off our original mortgage of £37,950.
Standard Life have provided the following projection:-

Based on payments of £48.82 per month

Basic Value£11,995
Final Bonus £1,505
Total value £13,500

Sum assured £12,334
Minimum amount payable on maturity £18,077

Projections from SL:-

3.75% (£21,600)
5.5% (£24,400)
7.25% (£27,700)

They have also provided a Mortgage Endowment Promise range of between £2,860 and £4,290.

Having seen many helpful posts previously regarding SL tendency to understate final projections, it appears that the picture may not be as bleak as is painted, however mindful of 7% appearing to be at best, the maximum scenario to budget for, and even allowing for the MEP at the top end(?) of the range, it still appears to leave approx £6k at least that we are short of. Is this a reasonable guestimation? I am missing something? (other than the shortfall that is!!)

I note from other posts that there is such a thing as a "terminal" bonus which may be applicable - if so, can I contact them to ask for this projected amount??

Assuming that there is a shortfall, and the need to promptly alter arrangements with respect of the current mortgage due to the fixed rate period ending, should we now put the likely "deficit" into the mortgage?? Is there another option for addressing this shortfall??

All responses greatfully received!!

EdInvestor

What interest rate are you expecting to have to pay on the new mortgage?

signofthetimes

Hi EdInvestor,
We are being offered a tracker rate of 0.59 above the bank base rate by our current lender, Barclays. Not the most competitive I accept, but seems reasonable, especially with no tie in/fixed term etc. What do you think??

EdInvestor

signofthetimes wrote: »

3.75% (£21,600)
5.5% (£24,400)
7.25% (£27,700)

They have also provided a Mortgage Endowment Promise range of between £2,860 and £4,290.

If you surrendered the endowment and used the lump sum to reduce the mortgage also boosting the monthly mortgage payment by the amount of the redundant endowment premium at a mortgage rate of 5.84%, your return at maturity would be 27,226.

IT's unlikely the WP fund will return more than around 5%, but there is the possibility of the mortgage promise.You might get a bit more if you held it, you might get less.To my mind it's not worth taking the risk, when the likelihood is you will get much the same as a no-risk, guaranteed cash investment.

When sold, you will recall, endowments were supposed to both pay off the mortgage and provide an additional lump sum.The reward for taking the risk has now clearly almost gone.

You could try selling the policy.

https://www.apmm.org

dunstonh

IT's unlikely the WP fund will return more than around 5%

Although it has been returning over 7%...

gfplux

If I understand correctly the projection includes their guess of the terminal bonus.

martinman3

dunstonh wrote: »

Although it has been returning over 7%...

"Past performance is not necessarily a guide to future performance.." :rolleyes:

Consider the fact that shareholders at Standard Life will now be put before policyholders and a likely bear market as shares are "revalued". I believe it means the likelyhood of receiving even those projections at 5.5% is slim as "smoothing" will be used as an excuse for poor fund performance while dividends remain healthy to keep the shareholders happy.

There is also the real possibilty of "Surrender Value Reductions" being reintroduced if cash becomes tight at Standard Life (as they did 5 years ago) if you try to leave the fund in the near future.

If you have an endowment policy purely as an investment then fine but when you are depending on it to redeem your mortgage, that is another matter.

signofthetimes

Many Thanks for the responses to date - it seems the general consensus is that we should sell our endowment on the basis that the higher end returns (7%) seem unlikely in the future??
If we were to sell the endowment along the lines of the advice of EdInvestor then it appears that we would still be looking at a £10k shortfall against our original £37k - if anyone has any recommendations as to the best way of reducing the pain of this, it would be gratefully received!! Should we simply overpay our mortgage as much as we possibly can from now on?? Or are there any other options available?

Thanks again for all of your time in reading this and advice/support!!!

dunstonh

it seems the general consensus is that we should sell our endowment on the basis that the higher end returns (7%) seem unlikely in the future??

If you mean that 1 poster means general consensus then yes you should surrender. However, Ed has been saying that for the last 3 or 4 years now. I have been saying the opposite and as of date, I have been correct. Take a look at Gorgeous Georges regular updates on his SL endowment over the last year or two (search his threads in this section) as it will give you further information to decide for yourself. I also suggest you look at the values of your own over the last few years to check progress.

If we were to sell the endowment along the lines of the advice of EdInvestor then it appears that we would still be looking at a £10k shortfall against our original £37k

You dont have a 10k shortfall. You have a projection which indicates that if returns were x% p.a. until maturity you will have a shortfall.

You need to get the cost of replacment life cover, the cost of surrender and the loss of the mortgage promise value as well as some of the terminal bonus. I would also want it in writing if the projections include current terminal bonus (telephone side often say it is but when its on paper it often says it isnt).

You need to tell us what your current annual/reversionary bonuses are as well as you havent done that on this thread yet. Not sure how anyone can tell you what is best without knowing the key facts.

martinman3

Here is the thread which dunstonh mentions http://forums.moneysavingexpert.com/showthread.html?t=467296

It is important to note that the endowment policy which surpassed projections is one which matured in March 2008.

This is to be expected as the endowment was taken out in 1983 and benefited from a stock market boom in the mid to late 80s and annual bonuses probably every year except the last few.

G.G. 's endowment matures in 2010 so missed out on 2 years of very good growth and looks like it will just about make it, with a following wind.

What do you think the chances are for the OP's endowment maturing in 2016 ?

I am not an IFA, I also never tell people what they should do, I leave them to make up their own minds.

dunstonh

What do you think the chances are for the OP's endowment maturing in 2016 ?

Getting rid or keeping could be best. I was only concerned that the OP appeared to be acting on Eds post which is making a guess based on limited information. A guess that could be right but could be wrong.

The data isnt available on the thread to make any realistic decision.