Will I owe tax if I surrender an endowment plan?
I have an offset mortgage with £20,000 outstanding. I also have a mortgage endowment plan, which will end in 18 months.
The surrender value of the endowment is currently £21,500. I have paid around £16,500 into the endowment policy.
I’m considering surrendering the endowment now and clearing the mortgage in order to free up the monthly mortgage payments. If I surrender the endowment, will I be liable for any tax?
It is likely that your endowment will provide a better return if you keep it running until maturity.
However, there are absolutely no guarantees of that, especially if your current surrender value of £21,500 includes terminal bonuses, as these can potentially be taken away if your underlying endowment investments perform badly over the next 18 months.
So your decision to surrender should focus on your desire to pay off your mortgage as soon as possible and then have more disposable income against the potential better returns you could earn from your endowment if you kept it running.
Against this backdrop it is understandable that you want to pay off your mortgage now.
The good news is that you are very unlikely to have a tax liability if you surrender your endowment. Mortgage endowment policies, such as yours, are usually established on what is called a ‘qualifying’ basis.
This means that as long as they abide by certain rules in terms of how long they run, how often premiums are paid, how much the premiums can vary, and the policy has a minimum level of life cover, the proceeds are paid out to policyholders with no further tax liability.
In practical terms, this means that if you have paid your premiums for a minimum of 10 years, or threequarters of the policy term if this is less, there will be no tax charge. As your policy only has 18 months remaining, you will meet this criteria and so your endowment payout should be tax-free.
Endowment mortgages were popular in the 1980s and 1990s. The idea was that you took out a mortgage and a separate endowment policy. For the life of the mortgage, you only repaid interest to the lender.
But you also made payments into your endowment policy. Those payments partly pay for a life insurance policy – which pays out to clear your mortgage if you die – and the rest is invested with the intention of growing so that when the endowment matures the lump sum is enough to clear the capital you initially borrowed.
There were a number of problems with endowment mortgages from mis-selling to poor stock market performance, meaning many people’s policies didn’t pay out enough to cover what they had borrowed.
is a certified financial planner at Chase de Vere.