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    • Del III
    • By Del III 12th Jul 18, 3:03 PM
    • 3Posts
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    Del III
    Warning of Endowment shortfall but no shortfall
    • #1
    • 12th Jul 18, 3:03 PM
    Warning of Endowment shortfall but no shortfall 12th Jul 18 at 3:03 PM
    I've got two endowments that mature in about 2 years time, one was for about 50k and the other for 21k. Like most people I've been getting the 'High risk of a shortfall' letters for many years now, but as my mortgage is no longer reliant on these endowments it's not an issue.

    This year I requested the cash in values so that I could compare them to the projected values in 2020. Given these values, the growth I worked out was about 1% per annum. So my idea was to cash in both endowments now and easily beat that 1% with my own investments.

    The smaller endowment is with Friends Provident / Aviva details below.

    Start date: 1998
    End date: 2020
    Premium Paid: 38.30
    Target: 21,143
    Projected final value: 16,100 (mid rate 2.6%)
    Cash in value today: 14,422
    Fund Description: Av FP With-Profits Sub-Fund (Main Series 4)

    Underneath the projection I noticed the words - 'this value does not include an allowance for final bonus'. So I asked about the final bonus and was told it currently stands at just over 5,600! Which would make the final predicted value over 21,700, which is more than the target amount. So no shortfall at all.

    I was convinced that this was a mistake and the 16,100 must include that bonus, so I called them again to clarify and the person I spoke to said that the bonus was on top of the 16k. I then asked why they were still sending me red shortfall letters, but they didn't have an explanation for that.

    Has anyone else had red shortfall letters when their endowment was still on target?

    I'm wonder if they're hoping people will cash in these policies and save them paying out the bonuses. I need to look at the Scottish Widows policy now.
Page 1
    • dunstonh
    • By dunstonh 12th Jul 18, 3:15 PM
    • 93,430 Posts
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    dunstonh
    • #2
    • 12th Jul 18, 3:15 PM
    • #2
    • 12th Jul 18, 3:15 PM
    Do remember that the projections are generally using artificially lower assumptions now. They are also before charges and cost of life assurance. Most endowments have been exceeding the mid rate projections for some time now.

    Given these values, the growth I worked out was about 1% per annum. So my idea was to cash in both endowments now and easily beat that 1% with my own investments.
    But are the investment returns similar to 1%? (I suspect not).

    that mid rate projection of 2.6% is probably understating by at least half

    I then asked why they were still sending me red shortfall letters, but they didn't have an explanation for that.
    Old fashioned WP plans were not built to provide the valuation methods and projection methods used today. Whilst the final bonus accrues as you go along, it is not technically part of the "current" value. endowment projection from the current value and exclude the final bonus.

    In the past, some providers actually projected lower than the surrender value because of that. Daft assumptions can lead to daft outcomes.

    Has anyone else had red shortfall letters when their endowment was still on target?
    yes. plenty of people.

    I'm wonder if they're hoping people will cash in these policies and save them paying out the bonuses.
    No. its just a quirk in the projections methodology and that is set by the FCA. Not the providers. Pension projections are seeing similar too. We are finding that income figures on pension projections are coming out around half real world figures. They are actually doing more damage than good.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • Del III
    • By Del III 12th Jul 18, 4:19 PM
    • 3 Posts
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    Del III
    • #3
    • 12th Jul 18, 4:19 PM
    • #3
    • 12th Jul 18, 4:19 PM
    Thanks for your detailed reply.

    I just got the figures back from Scottish Widows for the 2nd larger endowment. When asked, they revealed there was a loyalty bonus that is currently worth just over 10k (but could go up or down).

    They'd previously given me a cash in value of 32,500, but did not mention the bonus. Does that mean that if I cash this endowment in today, the payment would be 42,600 (32,500 + 10,100 bonus)?

    Start date: 1995
    End date: 2020
    Target: 48,682
    Projected final value: 36,100 (high rate 5.6%)
    Loyalty bonus: 10,100
    Cash in value today: 32,500 (no mention of a bonus)
    ------------------------------------------------------------------------------
    My calculated final value with today's bonus: 46,200 (high rate 5.6%)

    My business is property development & investment. My investments are currently returning around 15%, albeit with a higher risk. I can get another buy to let property without a mortgage that will yield 9% per annum before tax which should beat the endowment growth rate even without any capital appreciation.
    • dunstonh
    • By dunstonh 12th Jul 18, 5:23 PM
    • 93,430 Posts
    • 60,955 Thanks
    dunstonh
    • #4
    • 12th Jul 18, 5:23 PM
    • #4
    • 12th Jul 18, 5:23 PM
    The surrender value on the plan is what you would get if surrendered early. That value includes any final bonus accrued to date. The current value is the one that normally excludes the final bonus accrued to date.

    So, the SW one at 32.5k is the figure. SW are likely to be on a unitised with profits fund rather than a conventional with profits fund. So, that should just be the unit price x number of units plus final bonus accrued so far.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • Del III
    • By Del III 12th Jul 18, 6:36 PM
    • 3 Posts
    • 0 Thanks
    Del III
    • #5
    • 12th Jul 18, 6:36 PM
    • #5
    • 12th Jul 18, 6:36 PM
    So the SW one at 32.5k / 36.1k does have a shortfall and the FP endowment possibly not.

    It's hard to get a straight answer out of SW or FP, as they can't commit to any of the figures. Maybe I'm using the wrong words, I'll ask them what the surrender value is next time.
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