Ask Sindie: 'Will I have to pay tax on my endowment?'

A reader fears being penalised for cashing in a failing policy

Q. Can you clarify the tax position for payments from cashed-in endowments? My under-performing Friends Provident policy was taken out in 1988 for £53,500. It is now predicted to pay out around £38,000 at maturity in 2013.

Having already received £2,000 compensation for the original mis-selling [of the endowment], I have finally decided to cash the policy in - and have been offered £20,000 to do so.

(For the remainder of my home loan, I will switch to a repayment mortgage.)

But flicking through Pay Off Your Mortgage in Two Years - a book based on the recent BBC2 series - I stumbled across a paragraph suggesting that if an endowment is cashed in early, the profits may be taxable.

If this is the case, I feel I will have no option but to continue with the endowment until maturity.

DK, via email

A. Sindie has managed to track down a copy of the book that accompanies the TV series of the same name, written by Graham Hooper.

The line you refer to reads: "Endowment proceeds are protected from tax by a relief known as 'qualifying status', which may be put into jeopardy if surrendered."

But Patrick Connolly of independent financial adviser John Scott and Partners says you only need worry if your endowment meets certain criteria: "If your policy is surrendered within the first 10 years - or 75 per cent of the [policy's] term if sooner - then the gain could be liable to income tax."

In your case, while 18 out of 25 years is not quite three-quarters of the policy term, it is well in excess of 10 years - so you won't have to pay any tax. Note, too, that even if your policy were less than 10 years old, you would be required to pay tax only if you were a higher-rate earner and the surrender value of your policy actually exceeded the total premiums paid - highly unlikely after such a short time.

If you need help from our consumer champion, write to Sindie 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.