I have an endowment policy and I am wondering if I should encash it. I took it out for a mortgage and I no longer have that mortgage so I thought about just keeping it for a savings plan. Is that a good idea?
It’s quite common for this to happen and it’s all too easy to continue to save on the grounds that it will be ‘free money’ when it matures. Nothing could be further from the truth.
An excellent question to ask yourself is: ‘knowing what I know now, would this be the best savings plan to set up? If the answer is no, you should look to see if there is an appropriate exit plan that is more suitable for your capital. It’s a difficult one to answer in an article but there are a few parts to it.
Is it the most tax efficient way to save? Is it the most charge efficient solution? Is it the most effective way to have my money managed i.e. via the access to the best managed funds? Finally is it the best product to save in and if not what’s the best solution?
Tax first: The capital is invested in a fund that pays tax as it grows therefore it is c20% per year worse off than a similar fund invested in an ISA or offshore bond for example. So that’s not a good start.
Secondly charges: Endowments were attractive (not to consumers) to advisers because of the commissions that were payable. The first two years often disappeared in commission charges and they also have hefty annual management charges, monthly policy fees which are fixed and switching charges, so once again they are at a sad disadvantage to an ISA. They also have life insurance inside the policy which you will be paying for which is expensive and will be reducing the amount of money invested, whereas with an ISA the whole amount will be invested.
Third: Endowments rarely have access to the better funds. In the vast majority of cases you simply have access to a managed life fund. This is a fund that is managed by one individual which spreads the capital across property, cash, fixed interests overseas and UK equities. How does that manager have expertise in all areas? Within an ISA or unit trust you can choose the best fixed interest manager, the best overseas manager etc thereby having access to all the best funds.
And so it confirms the death of the endowment as a solution for savers.
However before you consider encashing, consider a couple of key points. What will you lose? If you are in a Norwich union Aviva with profits endowment for example, ask if you will lose any reattribution benefits.
If you are in a with profits endowment, you can sometimes auction your plan to acquire the best price. An Independent Financial Adviser will be able to do that for you. The buyer of the endowment will offer you more on the basis that if they maintain the plan on your behalf they will potentially get a proportion of the final bonus at maturity.
In order to check if your endowment is worth encashing or keeping, follow this route:
Ask the insurance company for a surrender value, then approach your Independent Financial Adviser to see if the plan can acquire a higher auction value. In order to compare an ISA v the endowment you would then ask for an illustration for an ISA of the capital (surrender value) to go into the ISA along with all future premiums you would have paid into the endowment.
This will give you a comparative value at maturity to what you would get if you kept the endowment policy going. Undoubtedly the ISA should show a better maturity value than the endowment given its tax and charge efficiencies above.
I hope that helps.
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