Calculating/Presenting Savings with Surrender Penalty.

Hi All,

I've very recently made the switch from Associate/Administrator to Assistant Parapalanner and after working on a recent case, I've managed to confuse myself with the following:

Let's take a client with an offshore regular savings plan, valued at £30k with fees of 6% per year and the recommendation is to surrender the plan, paying a £10k surrender penalty, and invest the £20k remaining proceeds into a cheaper solution charging 2% per year (all figures are fictitious for ease).

When presenting the savings in the report for example, would you show the difference between £1800 (6% of the 30k) and £400 (2% of the surrender value of £20k), therefore an annual saving of £1400 per annum, meaning the surrender penalty would be recouped in 7.14 years?

Alternatively, would you show the difference between the current fees of £1800 and 2% of the current value of the plan, 'pre-surrender' i.e. £30k, (2% x 30k = £600) therefore the saving would be £1800 - £600 = £1200, meaning the surrender penalty would be recouped in 8.33 years.

I believe I've just been over thinking the different scenarios and so now it's hard to make sense of it all, and I was hoping that hearing the logic from someone else may make it finally click.

Thank you all!


  • Personally I would use an illustrative like-for-like comparison (i.e. both at £30k) to illustrate that the figure is 4% lower per annum. Then, I would explain that due to the £10k being lost to fees only £20k is to be invested - then I would base the recuperation figures on the actual figures (i.e.2% of £20k) as that will be the realistic time it will take to make up the difference.

    (I hope that makes sense!)

  • I would be doing a surrender value projection year by year for both plans assuming the same growth rate (say 4% pa) Apply bond charges and surrender penalties each year.
    Then show long before the £20k SV is better than the £30k SV.

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