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Surrender endowment policy?

Tax | Income Tax Helpful? 4

Asked by mal3230, submitted 03 January 2012.

Open Quote We have a Friends Provident Joint Life Endowment with profits policy.

It’s got 2 years to run, and has a current surrender value of £40,734, however the policy only has a guaranteed minimum payout of £39,340.

We are paying £126 per month.

We have paid our mortgage off, and we don’t need the life cover.If I cash this policy now will we have to pay and tax on the£40,734?
I pay the higher rate tax, my wife pays basic rate tax but is close the the upper limit.

Or should we continue on with the payments (total over 2 years would be £3024)?
End Quote

Answered by Justin on 30 August 2012

Let's start with the simple answer - tax. Your endowment is technically called a 'qualifying' policy and provided you don't surrender during the first three quarters of its term then it's deemed to have qualified which means no tax to pay on surrender. Whether you have a 10/20/25 year policy, with just 2 years left to run it will have qualified by now.

These types of policy are taxed internally at basic rate anyway so no tax benefit for basic rate taxpayers. But for higher rate payers like yourself you at least avoid paying extra higher rate tax.

Whether to surrender now or hold until maturity is more difficult to answer. On the one hand, the surrender value looks appealing versus the guaranteed minimum payout (especially taking ongoing contributions into account), but what really matters is the size of 'final' bonus, if any, Friends Provident (now called Friends Life) will pay at maturity. Your endowment very likely invests in a with-profits fund, which holds back some profits in reserve to help smooth over bad years. Any reserves left in the pot at maturity are paid as a final bonus - more details on our life investments page.

Unfortunately, final (or 'terminal') bonuses can be unpredictable, so hard to second guess whether you should stay put or surrender. I'd ask Friends Life whether they'll estimate your final bonus, tell you how much has accrued to date or provide an example of how much it was on a recently matured endowment of the same duration as yours. This might at least give you a steer on how much you might get.


Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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