Endowment holders face another cut in payouts. Is it better to stay in for the long haul or cash your policy in early?
Patrick Collinson
The Guardian, Saturday 2 March 201
From http://www.guardian.co.uk/money/
Some endowments, such as Standard Life, contain guarantees, but if there is no guarantee or final bonus, you might consider cashing in. Photograph: Murdo Macleod
There are still millions of endowment policies in force, with some 2m alone maturing this year. So if you have one of these, what are your options?
• Should I carry on paying the monthly premium or would that be throwing good money after bad?
First, you should contact your provider for a projection to see what your policy is worth now (its "surrender value") and what it might be worth at maturity. Make sure you update the company if you have changed address. Then ask the following questions:
• Are there any guarantees in the endowment? Some policies, such as older contracts at NPI, have guaranteed annual bonuses of 4%, which is better than anything you will find on deposit at a bank. Some funds at Zurich and Standard Life also contain guarantees.
• Is there an "estate distribution"? Some of the grand old insurers have built up reserves (known as estates) beyond what is needed to pay policyholders. The financiers and shareholders are desperate to grab them, but the regulators insist they share the cash with policyholders. Britannic, Scottish Mutual, Scottish Provident and Pearl are all distributing residual estates. It's one reason why Pearl is one of the few major companies to have increased payouts this year. But these only apply if your endowment is with-profits rather than unit-linked.
• Will I pay a penalty to get out of my endowment? Probably. Insurers call it the market value adjustment or MVR and it can be over 5%. Ask if the policy has an MVR-free date when you can cash in without penalty.
• Is there a decent final bonus? If you have a unit-linked policy, it rises and falls in line with the underlying investments and doesn't offer a final bonus. But if your policy is with-profits there is likely to be an element of final bonus, although this varies enormously. Most Phoenix policies are paying near-zero annual bonuses but are paying relatively large final bonuses. For example, on a Scottish Provident 25-year, £50 per month policy, almost a third of the £33,810 maturity value is made up of a £10,000 terminal bonus. But a Sun Alliance policy paying out £24,634 has a terminal bonus of just £3,104.
• What is the endowment invested in? Some endowment funds have almost sold out of shares. So if the stock market jumps, the value of the endowment barely rises. Typically, only around a third of an endowment is in shares but some are higher. Patrick Connolly at AWD Chase de Vere is a fan of Prudential, which has some of the highest endowment payouts. He said: "The financial strength of the product provider, its ability to invest in growth assets such as equities and its commitment to paying competitive bonuses should be important considerations. Prudential is the market leader in all these respects."
• Can I claim any compensation for mis-selling? Most policyholders are now outside the time limit for making a complaint – which has to be three years after the date you received the first letter warning of a high risk of a shortfall on the policy (and at least six years since taking the policy out).
• So should I cash it in? Take the surrender value, add in the remaining payments you have to make, and compare it to the projected maturity value. Calculate the additional savings you'll make by paying off most of your mortgage now. If it's anywhere near the maturity value, then it's probably best to cash in.
Case study: From sure fire to sure loser
It was the "sure fire" way to pay off a mortgage, said the Legal & General salesman to first-time buyers Gideon and Anne in 1991. They'd even get an extra lump sum at the end, to spend on a new car or holiday. All they had to do was pay £123 a month into an endowment for the next 25 years, and their £77,900 interest-only mortgage could be safely forgotten about.
But what the adviser did not say was that he'd pocket a commission of around £1,700, and that his projections were hopelessly optimistic. "At no point was there any suggestion this would fail to pay off the mortgage, or any talk of fees or charges," says Gideon, an architect from West London.
Yet within just nine years it emerged that the endowment was falling far short of expectations. L&G wrote to the couple, warning of a potential shortfall of £20,000. Three years later it also admitted that the projections given at the outset would never have been met – because the premiums were based on "industry standard charging assumptions" when in truth, L&G's charges were higher.
In 2006 the couple complained to L&G, by phone, about the performance of the endowment, but were told the blame lay in stock markets rather than mis-selling. "I got a mealy-mouthed letter in reply and no suggestion that we could take it further," says Gideon.
He now regrets shuffling the papers to the back of the family's filing cabinet. Last April he tried to make a formal complaintabout the endowment, but was told by L&G he was "out of time".
This January, with the endowment shortfall now projected at £26,000, the couple took the opportunity of the stock market rally to cash in. They received £43,937 – after £31,416 of payments over more than 21 years.
Gideon says: "We would have done a lot better putting our monthly £123 in a building society, especially given the high interest rates in building societies in the 90s and early 2000s. Add to this all the money we have paid on our interest-only mortgage – it was in the seven and eight percents for much of the time – and – we have lost hand over fist. The only thing saving us now is the drop in interest rates in the past few years, so at least we are able to overpay our mortgage"
The Guardian, Saturday 2 March 201
From http://www.guardian.co.uk/money/
