Questions of Cash: Get quotes before cashing in endowments
Saturday 09 October 2004
Q. I took out a Royal & SunAlliance with-profits endowment policy in 1989, which matures in 2014.
Q. I took out a Royal & SunAlliance with-profits endowment policy in 1989, which matures in 2014. The related mortgage is paid off. I now have a repayment mortgage coming to the end of the tie-in period in November when there will be £25,000 outstanding. I have £20,000 on deposit from a windfall earlier this year; a further £20,000 in cash ISAs; and £20,000 in share PEPs and ISAs.
The surrender value of the endowment in 2001 was £5,500 plus bonus of £1,000. Should I surrender or sell my endowment in November, add the proceeds of my windfall and pay-off the whole mortgage, or make overpayments to pay it off? I have no dependents and don't need the life cover.
MH, by e-mail.
A. The general advice has been to avoid surrendering with-profits policies, because of losses incurred through market value adjustments - penalties for early surrender. But the poor terminal bonuses produced by many policies has cast doubt on this approach and you will probably be best served surrendering your policy to pay-off the repayment mortgage.
You should seek quotes for selling the policy, but in current market conditions you may have difficulty obtaining a better price than the surrender value, especially as RSA's is a poorly performing closed fund.
Ray Boulger of Charcol mortgage brokers adds that you should obtain a formal surrender value before you make a final decision and you might consider keeping a mortgage debt of £1 in order to have somewhere to securely keep the house deeds free of charge.
Q. Fifteen years ago, I took out a life policy with Co-operative Insurance Society (CIS), that matures next year. The with-profits sum assured is £17,000: I paid a monthly £100. My annual bonuses has been £7,839, which gives me £24,839 to be paid to me. But the bonus this year is just £112, which is interest on my investment of half a per cent. Is CIS going out of business? Should I cash it in and risk losing a penalty, in order to protect my investment?
A. With-profits investments produce "smoothed" returns - the highs and lows are evened out. During the years when the stock market was performing badly, the capital value of your investment was protected. In this context, the bonuses produced by your policy were not that bad.
You do not need to be concerned about solvency. CIS is a subsidiary of the Co-operative Group, a large and profitable retailer. If you cash-in your endowment a market-value adjustment would not be imposed because of the type of policy you took out. However, you would lose the terminal bonus.
While there is no guarantee that any terminal bonus will be paid on your policy, the terminal bonus this year was 15 per cent and by surrendering it you risk losing a significant sum and we would advise against this course of action.
Q. I am worried about the long-term viability of my occupational pension, given the publicity about pension shortfalls. Should I switch from my occupational pension to a personal pension to lock-in the current pension value? I have been a member of the pension scheme for 36 years, which offers 40/60ths of final salary and I do not expect to change employer before retirement.
RA, by e-mail.
A. Carl Melvin, a pension adviser at Pension Transfer Solutions, says: "It is generally a bad idea for an active member of a final salary pension to opt out and transfer benefits." You should first contact the trustees of your employer's scheme, obtain the latest pension scheme report and valuation to see if the scheme has a deficit, how much it is and what the company will do to rectify the shortfall.
You should then talk to a union or personnel representative, to seek an assurance that the scheme is financially sound. But as it is a company scheme, the solvency of the employer is actually more significant than that of the scheme. The risk attached to an occupational pension scheme from an employer insolvency will lessen once the personal protection fund is established, and the Pensions Bill that will create this is currently going through Parliament.
Q. Our daughter is going to a boarding school in Denmark and we will pay her fees on a monthly basis. We will also transfer pocket money. What is the best and cheapest way of transferring money abroad?
LG, by e-mail.
A. One option would be to open a bank account in Denmark to pay the fees. Your daughter's school may be willing to pay her the money on your behalf.
Denmark is outside the eurozone, but the euro is widely accepted and independent schools usually accept payment in euro. So an alternative would be to open a euro account. This would enable you to make cash withdrawals anywhere within the eurozone without paying the exchange costs.
Do not open a euro account in the UK as you will still have to pay transaction charges. It may be easiest in the Irish Republic, but you may have to open the account in person to satisfy money laundering regulatory requirements.
* If you have questions, write to Questions of Cash, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail firstname.lastname@example.org. We can reply only to letters published. Please send copies, not originals.
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