Mouse said:

Since this was taken out in 1991 and you are quoting a "value now"

rather than mentioning bonuses, I assume you have a unit linked

endowment.

I'm too lazy to get into the maths - sorry

That's a pity, since the maths is really what the OP was asking about.

But you're right, the points you list (now snipped) are important to

think about, and so perhaps the OP should have been asking something

else. But he didn't, and the answer he asked for is probably worth

giving even if it doesn't perhaps tell the whole story.

Even if I wasn't being lazy on the maths, it's hard to work out the

rate of return on the information you've posted. For starters, some

of that £97.60 per month will be for the life cover. If you need the

life cover, you might want to deduct that cost from the premium before

you work out rate of return.

Reading between the OP's lines, I would incline to the conclusion that

he has no need for the life cover, and so he is basically throwing away

the cost of life cover in order to buy into whatever the tax benefits

are of having an investment linked to a qualifying policy.

It should be easy enough to discover (by looking at his annual statements)

what the cost of life cover is. I would guess that it's about a quarter

of the premiums. This means that the rate of return on the 75% which is

invested needs to be higher (to make up for the 25% thrown away) than

that for any alternative form of investment into which he might consider

switching 100% of his future premiums (if indeed he even wants to carry

on investing a fixed monthly sum).

Direct investments might lose him some return if it's taxed, and this

partly compensates for the wasted cost of life cover, but he could fight

off the tax in other ways, such as by channeling future investments

through an ISA.

An average rate of return may not even be all that helpful to you -

both interest rates and return on investments have been higher in the

1990s than they are now, so an average rate might show that your

policy performed very well (or indeed very badly) during the 90s

without saying anything at all about what it might do now.

Quite true, but even though it may not be too helpful, it's bound to be

in some sense interesting.

As for the maths, what we would do is apply the fiction of uniform

monthly growth. So if one were to expect, say, 7% annual growth,

the monthly growth factor would be f=1.07^(1/12).

If he invests a premium p monthly for 300 months, then 300 months

after making the first payment, his investment should be worth

p*f*(f^300-1)/(f-1).

This formula is not straightforward to solve for f, but it can be

done either iteratively, or graphically by plotting the value of

the investment for fixed values of p and 300, as a function of f,

and seeing for which value of f we get a particular fund value.

Hoping to get £70k after 300 months of investing £97.60pm requires

an effective rate of return of about 6.37%pa. That's what the

investment is "worth" to him. The actual rate of return needed on

the basis of investing only 3/4 of the premiums is 8.29%pa.

On the latter basis, the fund value after the 201 payments he has

now made (201*97.60 = about 19.6k) should be £30943. Since it

only stands at £24600, it hasn't been getting the 8.29% hoped for,

but only about 5.83%.

If growth were to continue at 5.83%pa for the remaining 99 months of

the term, his existing £24600 should grow to 1.0583^(99/12) times

that value (i.e. £39261) and if he continues to pay 99 more tranches

of £97.60pm (of which 75% is invested at the same rate), this would

contribute a further £9260. He'd get £48521. Not bad, considering

he really wanted £70k.

It's also worth pointing out that the aforementioned £9260 is *less*

than 99*£97.60, so it would be daft to continue paying in. So an

option is to make the policy paid-up, i.e. to cease paying premiums

but to leave the £24600 in there to grow.

Whether the investment return will be better or worse than 5.83% is

anybody's guess, but with an ordinary high-interest cash account he'd

be struggling to match that. Could just cash in the £25k and buy a

yacht.