endowment policy

Since this was taken out in 1991 and you are quoting a "value now" rather than mentioning bonuses, I assume you have a unit linked endowment.

I'm too lazy to get into the maths - sorry - but depending on your circumstances rate of return might not be the only consideration.

It isn't usually a good idea to keep an endowment solely for the life cover, but in some (admittedly rather rare) circumstances you might want to consider it. In particular, if: you have dependents, you have no other life cover, you have insufficient assets elsewhere to provide for your dependents after your death, and your health has changed sufficiently since 1991 for it to be difficult for you to obtain life cover elsewhere, you should think very carefully before giving up the life cover that goes with the endowment.

1991 is kind of early for this, but you might find that your policy includes other benefits - critical illness cover, waiver of premium benefit etc - and if you need them, think about how you'll replace them before you cancel anything.

Unless you are a higher rate taxpayer this won't be a concern, but most endowments are taken out as "qualifying" for tax purposes, meaning that you don't have any personal liability to tax on the proceeds. Unit linked endowment policies often don't produce enough of a gain for this to be an issue, but if you are a HRT you might want to look into this some more - there's no point moving your money to somewhere where it gets a higher headline rate only to lose your gains to HMRC.

Even if I wasn't being lazy on the maths, it's hard to work out the rate of return on the information you've posted. For starters, some of that £97.60 per month will be for the life cover. If you need the life cover, you might want to deduct that cost from the premium before you work out rate of return. (Very occasionally you'll come across an endowment policy that appears to have a negative rate of return - that's usually because the policyholders are either very old or in very poor health, and the life cover is a huge percentage of the premium).

An average rate of return may not even be all that helpful to you - both interest rates and return on investments have been higher in the

1990s than they are now, so an average rate might show that your policy performed very well (or indeed very badly) during the 90s without saying anything at all about what it might do now. (Obviously past performance not a guide to the future etc etc, but average past performance over the last 17 years can be even less of a guide than past performance over the last two or three years).

One thing that might be helpful to you is to get hold of the unit price of the fund your endowment is invested in at various points over the last, say, 1 to 5 years. Ignoring charges/life cover/etc, that will give you some idea of the rate of return. In addition, different life offices have different strengths and weaknesses, and some are rather more solid than others.

Mouse.

Since this was taken out in 1991 and you are quoting a "value now" rather than mentioning bonuses, I assume you have a unit linked endowment.

I'm too lazy to get into the maths - sorry - but depending on your circumstances rate of return might not be the only consideration.

It isn't usually a good idea to keep an endowment solely for the life cover, but in some (admittedly rather rare) circumstances you might want to consider it. In particular, if: you have dependents, you have no other life cover, you have insufficient assets elsewhere to provide for your dependents after your death, and your health has changed sufficiently since 1991 for it to be difficult for you to obtain life cover elsewhere, you should think very carefully before giving up the life cover that goes with the endowment.

1991 is kind of early for this, but you might find that your policy includes other benefits - critical illness cover, waiver of premium benefit etc - and if you need them, think about how you'll replace them before you cancel anything.

Unless you are a higher rate taxpayer this won't be a concern, but most endowments are taken out as "qualifying" for tax purposes, meaning that you don't have any personal liability to tax on the proceeds. Unit linked endowment policies often don't produce enough of a gain for this to be an issue, but if you are a HRT you might want to look into this some more - there's no point moving your money to somewhere where it gets a higher headline rate only to lose your gains to HMRC.

Even if I wasn't being lazy on the maths, it's hard to work out the rate of return on the information you've posted. For starters, some of that 97.60 per month will be for the life cover. If you need the life cover, you might want to deduct that cost from the premium before you work out rate of return. (Very occasionally you'll come across an endowment policy that appears to have a negative rate of return - that's usually because the policyholders are either very old or in very poor health, and the life cover is a huge percentage of the premium).

An average rate of return may not even be all that helpful to you - both interest rates and return on investments have been higher in the

1990s than they are now, so an average rate might show that your policy performed very well (or indeed very badly) during the 90s without saying anything at all about what it might do now. (Obviously past performance not a guide to the future etc etc, but average past performance over the last 17 years can be even less of a guide than past performance over the last two or three years).

One thing that might be helpful to you is to get hold of the unit price of the fund your endowment is invested in at various points over the last, say, 1 to 5 years. Ignoring charges/life cover/etc, that will give you some idea of the rate of return. In addition, different life offices have different strengths and weaknesses, and some are rather more solid than others.

Mouse.

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Sparing no blushes, great stuff ! With so many newsgroup postings continuing to deteriorate, it's really refreshing to see such a comprehensive and well written post.

Cheers me dears. A lot there to digest and think about. I'll take it apart a bit at a time. Ta BB

That's a pity, since the maths is really what the OP was asking about. But you're right, the points you list (now snipped) are important to think about, and so perhaps the OP should have been asking something else. But he didn't, and the answer he asked for is probably worth giving even if it doesn't perhaps tell the whole story.

Reading between the OP's lines, I would incline to the conclusion that he has no need for the life cover, and so he is basically throwing away the cost of life cover in order to buy into whatever the tax benefits are of having an investment linked to a qualifying policy.

It should be easy enough to discover (by looking at his annual statements) what the cost of life cover is. I would guess that it's about a quarter of the premiums. This means that the rate of return on the 75% which is invested needs to be higher (to make up for the 25% thrown away) than that for any alternative form of investment into which he might consider switching 100% of his future premiums (if indeed he even wants to carry on investing a fixed monthly sum).

Direct investments might lose him some return if it's taxed, and this partly compensates for the wasted cost of life cover, but he could fight off the tax in other ways, such as by channeling future investments through an ISA.

Quite true, but even though it may not be too helpful, it's bound to be in some sense interesting.

As for the maths, what we would do is apply the fiction of uniform monthly growth. So if one were to expect, say, 7% annual growth, the monthly growth factor would be f=1.07^(1/12).

If he invests a premium p monthly for 300 months, then 300 months after making the first payment, his investment should be worth p*f*(f^300-1)/(f-1).

This formula is not straightforward to solve for f, but it can be done either iteratively, or graphically by plotting the value of the investment for fixed values of p and 300, as a function of f, and seeing for which value of f we get a particular fund value.

Hoping to get £70k after 300 months of investing £97.60pm requires an effective rate of return of about 6.37%pa. That's what the investment is "worth" to him. The actual rate of return needed on the basis of investing only 3/4 of the premiums is 8.29%pa.

On the latter basis, the fund value after the 201 payments he has now made (201*97.60 = about 19.6k) should be £30943. Since it only stands at £24600, it hasn't been getting the 8.29% hoped for, but only about 5.83%.

If growth were to continue at 5.83%pa for the remaining 99 months of the term, his existing £24600 should grow to 1.0583^(99/12) times that value (i.e. £39261) and if he continues to pay 99 more tranches of £97.60pm (of which 75% is invested at the same rate), this would contribute a further £9260. He'd get £48521. Not bad, considering he really wanted £70k.

It's also worth pointing out that the aforementioned £9260 is *less* than 99*£97.60, so it would be daft to continue paying in. So an option is to make the policy paid-up, i.e. to cease paying premiums but to leave the £24600 in there to grow.

Whether the investment return will be better or worse than 5.83% is anybody's guess, but with an ordinary high-interest cash account he'd be struggling to match that. Could just cash in the £25k and buy a yacht.

Ta again. Printing off and taking to pub to read. Be a small yacht for 25K and I get sea sick. Why did I do my day skipper? BB