“My Endowment Is A Complete Waste of Money. What Should I Do With It?”
“I took out an endowment to ensure I could pay off my mortgage at the end of my mortgage term but I keep getting red letters in the post warning me that it is not going to be big enough to pay off my mortgage. What should I do with it?”
At Informed Choice we hear this regularly. Endowments were (are) a great idea in principle; you save regularly into a tax efficient investment plan which is targeted to produce a capital value at the end of the mortgage term. The monthly contribution set out at outset varied depending on the expected growth rate, future capital sum needed and mortgage term.
The problem with endowements is that the projections applied were done during the boom times when markets were going up and up. As soon as they fell post the dot.com bubble and following 9/11 it soon became apparent that the annual growth needed was not likely to be achieved.
As a result many endowment customers are faced with a shortfall. This may be a real short fall if you still have an endowment and are relying on it to provide capital at the end of the term or a paper shortfall if you have been able to repay your mortgage debt through other means.
You have four options with what to do with your endowment:
1) Do nothing. Continue to make the regular payments and wait to recieve the capital sum on maturity. The capital sum you receive will depend upon the growth rate you ‘enjoy’ between now and then.
2) Stop paying contributions but keep the plan invested. This will create a capital value at the end of the term, albeit a smaller one than if you continued to make contributions. Doing this will enable you to use the money you were paying away each month in contributions more effectively. This may be to repay capital on the mortgage or other debt or perhaps to make ISA or pension contributions instead. On this point, don’t think just because your endowment has performed badly any investment is pointless.
3) Surrender the plan and take the value now. Your endowment will have a surrender value. This will be the value of the units you hold and you can elect to take this capital sum. Again, this could be used to repay debt or re-invest.
There are potential downsides to surrendering early however. You may be paying a penalty known as a Market Value Reduction (MVR) to surrender it or giving up a bonus, known as the terminal bonus, that may be applied at maturity. Additionally, you may be giving up an important death benefit. Endowments will often pay out a capital sum on your death that is greater than the surrender value and you would have to pay additional premiums to cover this through a life assurance policy.
Surrendering and re-investing the capital also does not guarantee a higher future value.
4) You can sell your endowment on the traded endowment market. This could get you a higher value than the quoted surrender value but the re-sale value you are quoted will differ depending on the ‘quality’ of your endowment. You may also find that after charges and administration the extra value is negligible. Selling your endowment has the same potential disadvantages as mentioned in point 3 above.
If you still have a mortgage and you do decide that maintaining the endowment is not for you it is important that you do have a plan in place to cover the outstanding mortgage debt at the end of the term. This may be by re-investing the capital and saved premiums or by asking your mortgage provider to convert it to a capital and repayment mortgage.
If you would like to advice on your endowment click here.
If you found this article of interest more can be found at www.icl-legal.co.uk. If you have friends and family in the law that would benefit from this or any other articles produced on this blog please do forward it on.
You can subscribe to receive these articles to your inbox automatically by providing your email address in the ‘Receive our Newsletter’ box at www.icl-legal.co.uk
Picture courtesy of Images of Money via Flickr.com