Endowment holders face another cut in payouts. Is it better to stay in for the long haul or cash your policy in early?

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.

Patrick Collinson

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source: http://www.guardian.co.uk/money/2013/mar/02/endowments-should-i-cut-my-losses


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