Your Mortgage Endowment - Cash in or Continue?

by : Ray Prince

Many new clients we meet have one or two unitised with profits endowments in their investment portfolio. Whilst some have decided that there may be better alternatives available for their money after years of falling returns (and questionable prospects), many are hanging on in the belief that things could take a turn for the better.

If you have one or more of these plans, what SHOULD you do?

Indeed, what CAN you do could be one of your main questions.

The reality is that the annual returns on 'unitised' with profits investments have been falling for the last 9 years.

NOTE: There are other types of endowment policies including Full Cost Guaranteed, Traditional With Profits and Unit-Linked plans. This article does NOT apply to these plans.

The way in which the unitised with profits plans work is that when your monthly premium is received by the insurance company, a percentage pays for charges and the remainder is split between paying for the life assurance/critical illness insurance and the actual investment.

The investment portion is split between:

- shares

- property

- bonds

- cash

With profits funds were designed to 'smooth out' the returns of the stockmarket. In years of good returns the insurance company would retain a portion of the profit and pay an annual bonus to your plan.

In years of poor returns the theory is that they would dip into their reserves and pay an annual bonus. Once these bonuses have been paid they cannot be removed.

If the insurance company you have your plan with is not financially strong, it's likely that they will be investing a higher proportion of your money in fixed interest (bonds) and cash, restricting potential future growth. Over the last 10 years many companies have been increasingly moving the money in their with profits funds towards bonds and cash.

So if the returns on your plan have been falling every year, and more of the money has moved OUT of shares, you don't have to be a genius to work out that future prospects may not be great.

If the company you are with is financially strong, you'll be ok, surely?

Maybe not.

Norwich Union is a strong with profits office and they have 43% of the money in their with profits fund invested in shares. Even so, the company predict that only one in ten of their 750,000 endowment policyholders will receive the original target sum at the end of the policy term.

The fund actually returned 10.7% in 2006. Even so, the company has REDUCED payouts on many plans that matured in 2006. They will be further reduced in 2007 by many companies.

Let's look at some actual payouts for a male aged 29, investing