Should I sell my endowment?

20 June 2008

I signed up for a 25-year endowment policy in 1989. I have never drawn on this for my mortgage and have instead kept it on as a savings policy.

Over the past couple of years, all I have read is doom and gloom about endowment policies. I am unsure whether to wait until the policy reaches maturity and hope that the tide turns in my favour, or cut and run.

MH/South Yorkshire

Ask The Professionals: Mark Pearson, financial planning director at Oregon Financial Services, says:

Don’t surrender, cancel or stop paying premiums to any life assurance policy without first seeking independent advice. This is for a number of reasons but principally you don’t know when you are going to die (so the life assurance element is important) and because cancelling a policy before it matures often means that you will lose money.

The surrender value of with-profits endowment policies is usually less than the face value, due to a charge known as a market value adjustment, but the penalty generally reduces the closer you get to maturity. Depending upon the size of your premiums, you could continue with the policy for the full term, but redirecting that money into an investment that is more suited to your needs might be a better option.

One option is to ‘trade’ your endowment policy instead. This involves selling the policy (generally with no tax charge to you) to a company that specialises in buying this type of investment. The amount that they are prepared to pay is usually much higher than the surrender value, but will depend upon a number of factors, such as the company, the bonus history and the term to maturity.

When you trade a policy, it is not cancelled but the company becomes the new owner and the policy continues to maturity or pays out in the event of your death before that date. As legal owners, the company will get the policy proceeds but it will have to pay the premiums from the date it acquires the policy and your commitment to that policy will cease.

Companies that buy and sell endowment policies are regulated by the Financial Services Authority and you can get more information from the Association of Policy Market Makers.

You will need to compare the cost of maintaining the policy with the cash that you would receive for it and the benefit of making more tax-efficient use of the premiums that you save.

If you can get a good price for your policy, seek independent advice as to how best to reinvest the capital and start redirecting the saved premiums into a more suitable investment.

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