Ask Sindie: Should I draw a veil over my endowment?

A reader asks if it's better to take the cash and run from a savings policy
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Q: I have a Scottish Widows "Versatile Endowment Plan" into which I pay £50 a month.

This was set up as a general savings plan 10 years ago - nothing to do with buying a house - and bought direct (without the guidance of a financial adviser) after I saw an advertisement.

In essence, the product is a 20-year "with-profits" plan, but it has a 10-year "get out of jail free" exit feature. This means I can take my money out now without paying a financial penalty.

I've recently had some correspondence from Scottish Widows and my question is this: should I stay or go? My options, as presented by the provider, are as follows.

To stay put and con- tinue with the plan for another 10 years; to convert it into what's called a "unit-linked" savings plan; to take the cash now and spend it on something else; or take the cash and put it into a special Scottish Widows "loyalty" bank account that pays interest.

My instinct tells me that continuing the with-profits option is the worst path to take, but I'm not sure what to do.

As it stands, the "guaranteed sum assured" to me as a policyholder is £10,040, the bonuses are £1,140.28 and the terminal bonus is £782.62.

If I get out now, halfway through the 20-year term, I will receive 50 per cent of all these sums added together - £5,981.45.

Now this is actually less that I have put in over the 10-year period (£6,000), which is more than a little disappointing. But I realise I have had some life cover during this period too, which must have been worth something.

Would I be right to get out of this with-profits plan? And if I go for taking the cash and putting it elsewhere - perhaps in an individual savings account (ISA) - where would be a suitable home for my money, given that I am a bit risk averse, which is how I got involved in with-profits in the first place?

I don't need the life assurance element of the original plan as I now have other cover.

HA, via email

A: "Take the money and run" is the short answer, though there are a number of points to consider before you make your final decision.

Endowment policies, especially the with-profits variety, have turned out to be poor investments, and that underperformance has been particularly marked over relatively short periods such as 10 years. This is mainly because of the high commission and other charges taken out of the early premiums paid by the customer; these eat into in- vestment returns.

Added to that, the with-profits industry has struggled over the past few years. The supposed "smoothing" benefits of with-profits policies - where the years of successful investment support poorer spells on the stock market - have not come through, due to weaker returns than expected from the markets over the past 10 to 15 years.

Estimates of growth of as much as 10 per cent a year were projected in the heyday of endowment policies in the late 1980s and 1990s. Unfortunately, these have failed to materialise. Indeed, so limited has the growth been that millions of homeowners who took out endowments to clear their mortgage at the end of the term now face a shortfall.

Justin Modray of independent financial adviser (IFA) Bestinvest says it would be hard to justify staying with your policy, and that's partly because with-profits plans have shifted out of equities and into "safe" assets such as bonds in recent years; in doing so, they have missed out on the present bull run on the markets.

"The [investment] outlook is not good and you have an opportunity to get out of the fund without an exit penalty," he explains. Many poorly performing plans have applied these penalties in a bid to prevent policyholders from leaving.

So your choice is to pick one of the other options.

You don't say what the rate of interest is on Scottish Widows' special "loyalty" account, but it's more than likely that it will be equalled or exceeded elsewhere - particularly if the alternative account is a mini cash ISA offering tax-free growth for your money.

However, Mr Modray backs a switch to either the Scottish Widows unit-linked plan - which is cheaper and simpler than the with-profits policy - or outside the company to an equity ISA.

"If you consider the former, you should ensure that there is no initial charge, that the annual charge is less than 1.5 per cent and that there is a suitable choice of investment funds. If this isn't the case, you would be better off in an ISA."

For the sort of low-risk profile you mention, look at a global growth fund. Products to consider include Midas Balanced Growth, Mr Modray says, or Invesco Perpetual's Distribution Fund, which invests in equities and bonds.

If you need help from our consumer champion, write to Annie Shaw at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS or email sindie@independent.co.uk. We cannot return documents, give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given.

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