Questions of Cash: There's no market for your endowment, so cash it in and pay off your mortgage

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The Independent Online

I have complained about my endowment policy and been offered £2,788 in compensation. My options are to use the compensation and surrender value of £13,919, add savings and pay off the mortgage, or take the compensation and keep the endowment.

Q: I have complained about my endowment policy and been offered £2,788 in compensation. My options are to use the compensation and surrender value of £13,919, add savings and pay off the mortgage, or take the compensation and keep the endowment.

The endowment is with Royal & Sun Alliance and projection of maturity value at 2011 is £29,900 to £39,900. My savings are in cash. Paying off the mortgage would not draw on my individual savings account. SL by e-mail.

A: Your cash savings are unlikely to earn as much interest as you pay on your mortgage, so paying off your mortgage may be your best option. Ray Boulger, of the adviser Charcol, says that in part your decision should be based on your attitude to risk: your endowment could still exceed its projected surrender value if the stock market recovers, but there is a strong chance it will not.

Many policyholders will find they can obtain more by selling their endowments than through surrender, but because of RSA's weak financial situation and low expectation for future bonuses there is no market for RSA endowments.

Q: I am 27 and recently started a new job. In February, I will have the opportunity to join my company's money-purchase pension scheme. Pensions under the scheme can be contracted into or out of the state second pension (S2P, formerly SERPS). I also have a sum, accrued over five years, from a final-salary pension scheme with my previous employer which I believe can be transferred into my new pension.

What advantages are to be gained from contracting into or out of S2P, and what should I do with my previous pension scheme? DR, Bristol

A: Carl Melvin, of the adviser Pension Transfer Solutions, assumes your employer's scheme is a group pension scheme. "It would make sense to join the employer scheme (especially if the employer will make contributions)," he says. "The decision to contract out of S2P will depend on age and earnings, but mostly whether you trust the government to keep its promises.

"If earnings are high and you are prepared for investment risk and rewards of contracting-out, that may be best. The deferred benefits are likely to be modest with a low transfer value. If you transfer to the new scheme you will give up guaranteed benefits in return for money-purchase benefits so investment risk and fund performance will be crucial".

The transfer value offered should be used to calculate the annual investment return needed to provide what you would have received in the final-salary scheme. But note that the transfer value for service after 6 April, 1997, will be treated as protected rights in transfer to a personal pension, so there will be no tax-free cash. But, Mr Melvin adds, you really need specific advice from a pensions adviser.

Q: I have a Smile current account opened two years ago when I lived in England. Although I now live outside the UK and the account is available only to UK residents, I have been able to continue to use it because I am a UK resident for tax purposes. But when I applied for a Visa credit card with Smile they turned me down. They said, I can't open any new accounts because I am outside the UK. Why won't they? What can I do? Irish banks have refused me a credit card because I have not lived here long enough. LM, Dublin.

A: Smile says its computer systems will not accept a foreign address, which is why you have been refused a credit card. Visa International says it is up to banks to decide the criteria for issuing cards. You may find difficulty in obtaining a credit card from any UK bank now that you no longer live in the UK.

Royal Bank of Scotland said it would not issue a credit card to someone not in the UK because credit cards are a form of unsecured lending. Irish banks may require several months of living there before they will issue you a card. You will probably have to wait for yours.

Q: Ten years ago, when my daughter married, she and her husband bought a house and were sold an endowment mortgage and pension. Since her divorce in 1995 she has carried the financial burden alone. What steps should she take to check she was not the subject of mis-selling? JP, by e-mail.

A: The only obvious grounds for a claim of mis-selling would be if your daughter and her husband were not properly advised of the risk of an endowment underperforming. Your daughter should have taken professional advice at the time of her divorce to make arrangements for life cover and pension. If not, she should now.

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