Endowments Don't Add Up: A Comprehensive Analysis

Savers were sold over 141,000 endowment insurance policies in the past 18 months, touted as a way to save for the future. However, these old-style plans are restrictive and less attractive compared to modern alternatives. Large insurance companies, such as Prudential, Norwich Union, and Legal & General, have stopped selling these plans due to changes in tax and savings rules, making Isas and pensions more appealing options. Many savers opt for Isas because they are more flexible and do not come with pricey life insurance.

Key Takeaways:

• Over 141,000 savers were sold endowment insurance policies in the past 18 months, highlighting the persistence of old-style plans despite their drawbacks.
• Only seven organizations, including Children's Mutual, Friends Provident, and Liverpool Victoria, are still selling with-profits endowments, as per a report by Money Management.
• The average return on a 10-year with-profits endowment is a dismal £7,113 on a £50 a month ( £6,000) investment, while some companies, such as Colonial, delivered a negative return of £5,528.
• Endowments can last anywhere from 10 years to 25 years or more, tying up savings in a package that includes life insurance and investing in shares, bonds, and property.
• The underlying fund in which the money is invested pays tax, typically ranging from 15 to 20%, and the policyholder may face a tax bill if they cash in before the end of the term.
• Independent financial advisers, such as Tim Cockerill and Brian Dennehy, recommend avoiding mixing investment and insurance in the same package, citing the inflexibility and high charges associated with endowments.
• Advisers suggest using Isas for investments, as they offer tax advantages, lower charges, and higher flexibility compared to endowments.

Statistics:

• 33% of policyholders do not last the course and cash in their policy within four years, resulting in high costs, according to the Financial Services Authority (FSA).
• £7,113 is the average return on a 10-year with-profits endowment on a £50 a month ( £6,000) investment, as per a report by Money Management.
• £5,528 is the negative return on a 10-year endowment from Colonial, as per the same report.
• 15-20% is the typical tax rate on the underlying fund in which the money is invested.
• 75% of the term or 10 years is the timeline for higher rate tax payers to avoid a tax bill when cashing in an endowment policy before the end of the term.

Sources:

• "Endowments Don't Add Up" by Sylvia Morris, Daily Mail, November 15, 2006.
• Money Management, a respected magazine, for figures on average returns on 10-year with-profits endowments.
• Financial Services Authority (FSA) for statistics on policyholders cashing in their endowments within four years.
• Independent financial advisers, such as Tim Cockerill and Brian Dennehy, for expert opinions on endowments and alternatives.