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Conditional surrender

I have got a with-profits endowment that has been performing poorly of late. Should I surrender it?

With investments such as these, there is never a clear-cut answer and it is therefore important to make a decision based on all the available facts. Things to consider are:

  • Loss of life cover
  • Terminal bonus
  • Charging structure
  • Market value reduction
  • Sale on secondary market
  • Tax position
  • Life assurance premium relief

    Endowments can be unit-linked, which means that you buy units in a fund, such as a UK equity fund, or can be invested in a “with-profits” fund which is the type of fund that you have got.

    The theory behind with-profits is a good one – the long-term benefit of stockmarket investment but without the volatility and with an element of downside protection.

    The reality, however, is different because these are such opaque investments.

    Sadly, this opacity makes it very difficult to decide on what to do with such investments, particularly when there are surrender penalties (market value reductions) involved and where you have no idea of what, if any, terminal bonus there might be – where returns have been good, a terminal bonus can be added on maturity/surrender but this is entirely discretionary and can therefore be removed at any time.

    You should find out whether an MVR would currently apply. You should also try to make a judgement on whether you are likely to get a terminal bonus at all.

    This is, of course, nigh on impossible but if it were my own money, if the endowment were quite close to maturity, I would be much more inclined to hang on to it in the hope that there would be a terminal bonus than if maturity were a long way off. To an extent, the decision really depends on what you would do with the proceeds.

    Many endowments are structured so that the bulk of the charges are taken in the early years. Therefore, if you cash in the policy early on, the amount you get back might not even match the premiums paid to date, whereas if you encash it in the later years, you might be cashing in a relatively low-cost investment.

    You can sell many endowment policies on the secondhand market and once you have got a surrender quotation from your insur-ance company, you should plug the information into an online comparison site and see if someone will buy it from you for more.

    Regarding the taxation position, most endowment policies are subject to what are known as the “qualifying rules”, whereby if premiums have been paid to the policy for a period of 10 years or more, then any gains you make are free of tax. Where a policy has been running for less than 10 years and has not been maintained for a period greater than 75 per cent of its original term, there is the possibility that any “gains” made within the policy could be subject to tax.

    Also, you should be aware that if the endowment was set up before March 14, 1984, it may be eligible for 15 per cent life assurance premium relief and this is something to consider in the surrender decision.

    Finally, and possibly most important of all, you should check what insurance you have via the endowment. As well as life insurance, you may also have an element of critical- illness cover.

    If you do not want to lose this cover, you should make sure that you set up a replace-ment policy before the endow-ment is surrendered.

    Jason Witcombe is a director of Evolve Financial Planning

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