Cash Clinic: Endowment troubles leave a few options, but be some may be useful

I have tried to make a decision regarding surrender, selling or keeping them until the end of term, however it all seems to hinge on what the value of the final bonuses will be on maturity. If I surrender now with two years remaining I would receive the surrender value, which includes around 550 as a proportion of the final bonus payment to date. Does this mean the final bonus on maturity will only be slightly higher, covering the remaining two years left or could it be substantially more when the policy is due to mature in full?

Can you also tell me why the projected 3.75, 5.5 and 7.25 per cent return rates – set by the Financial Services Authority (FSA) and used as a reasonable illustration of growth for endowment plans on maturity – are much higher than the actual growth rates currently applied to both of my policies?

The actual growth rates attached to my plans are between 0.25 and 0.5 per cent for the main plan and 1.5 per cent for the other. Are these lower figures quoted a more accurate assumption of growth at this time? If the FSA figures are being used as an illustration of growth and the actual figures are much lower, why are the FSA's much higher figures being used as an illustration?

NJ, Edinburgh

A The problem stems form historically very high growth rates being a ttached to endowment policies. The growth rates are calculated based on actuarial assumptions. As growth rates have progressively decreased over time, the monthly premiums have been insufficient to provide enough funds to redeem the loan.

Providers are now required to provide standardised illustration using low, intermediate and high growth rates of 3.75, 5.5 and 7.5 per cent respectively. These figures should not be viewed as indicative or actual growth rates, but purely as a comparative benchmark and industry-wide standard.

With two years remaining to maturity, you have four choices. You can: continue to pay the premium; make the policy "paid-up"; surrender it back to the insurance company; or sell it to an endowment broker.

The first two options ensure that you will qualify for any final bonus, albeit the bonus for a paid-up policy may be reduced. Paid-up means that the policy remains active but the investor does not have to pay further premiums.

Fully surrendering the policy now would mean that you could qualify for a final bonus as part of the surrender proceeds. The final option could result in a potential higher amount being paid out compared to the current surrender value, but this is not guaranteed. You should bear in mind that by surrendering your endowment, you will also lose the life cover attached to the policy.

The final bonus is effectively a loyalty payment to induce investors to stay. The final bonus is not guaranteed and entirely discretionary, that is it may in fact not materialise. Providers are not able to calculate the final bonus until the date the policy matures as the final bonus is subject to change until the date on which it matures.

Forgoing the final bonus with two years to maturity appears ill-advised, subject to the affordability of the premiums.

Regardless of which action you opt for, the certainty remains that you will face an endowment shortfall. As a matter of priority, you should be considering how this can be addressed.

Christian Poziemski is a financial Adviser at HBJ Gateley Wareing.

If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].

This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.