Cash in or hold on?
Hazell, Daily Mail
THOUSANDS of people cash
in their endowment* policies every week, fed up with falling returns
and warnings that their mortgage won't be repaid. But cashing in isn't
always the right decision. Here are the questions you should ask before
waving your endowment goodbye.
WHAT is the
endowment supposed to be doing?
PRESUMABLY, repaying your mortgage - and it's probably failing. Payouts
will continue to fall, and if you have not made arrangements to plug
the shortfall you should do so immediately. But that doesn't mean
cashing in your endowment will always be the best option.
BUT why keep it
if it's not going to pay off my mortgage?
SOME policies have a mortgage promise. A few guarantee
to repay the whole mortgage while others will top up your endowment to
certain levels without actually promising to cover the whole mortgage -
though some have conditions attached. They include Standard Life, NFU
Mutual, Wesleyan and Norwich Union's funds including Commercial Union
and General Accident.
WHAT are the
dangers of cashing in a policy?
YOU could trigger a tax bill. Endowments enjoy a special tax status,
but only if you keep them running for at least three-quarters of the
policy life and a minimum of ten years. Higher rate taxpayers who cash
in early could be liable to 18% tax on profits (the difference between
basic and higher rate tax). People whose endowment was taken out before
April 1984 also benefit from tax relief on premiums.
WHAT about life
YOU'LL lose your life insurance, so it's vital to get new cover for
your mortgage before cashing in. If you have suffered from certain
illnesses you may not be covered by a new policy whereas your endowment
will cover you. New life insurance could be more expensive because you
will be older. However, insurance rates have fallen so some people
could actually re-insure more cheaply.
reasons for keeping the policy?
THIS might sound unbelievable, but in some cases you
could have a reasonable investment. Some older policies with strong
insurers should make reasonable payouts. Remember that nearly every
stock market investment has lost money in the past four years, so it's
not surprising that payouts are falling.
WHAT has all
the fuss been about?
MANY endowments are saddled with poor management and high charges. They
have been mis-sold to people who did not need life insurance, were too
old to be swapping to a stock market investment or who did not
understand the product. Greedy salesmen encouraged people to tie their
mortgage to these products that were little more than stock market
WERE they good
AS A pure investment smoothing out stock market up and downs some have
worked. But as a mechanism for repaying a mortgage most are abject
failures. Some insurers have also poisoned them with hidden charges.
HOW can I judge
if my endowment is worth keeping?
ASK a good independent financial adviser* (IFA) - but they may be
reluctant to tell you to sell for fear of being accused of giving bad
Look at how your fund is
doing in the performance tables and ask whether it is still open to new
business and how much is invested in shares (at least 40% should be the
Check how much the
policy may pay out based on the reprojection letter you will have
received. Then ask for the current surrender value* and add this to the
cash savings you would make on not paying any more premiums.
Weigh the reprojection
amount against what you can earn on the surrender money elsewhere. Use
the lower projected rates except in the case of very strong firms such
as Norwich Union, Prudential, Legal & General and Standard
Life, says IFA Patrick Connolly of Chartwell.
WHAT are the
alternatives if I don't want to keep paying?
IF IT is a with-profits* endowment and has been running for at least
ten years you could try to sell it. Contact the Association of Policy
Market Makers for details. Or you may be able to make the policy
'paid-up'. Your money stays invested and will continue to earn bonuses.
When it matures you will get a payout, though it will be much smaller
than if you kept saving.