Prudential just lowered their interest rate for Cash Accumulation Balances

Thanks for the reply. I am aware of the participating fund concept. What I don't understand is that the participating fund plans issued the same reversionary bonus levels as previous years but the cashback account lowers the interest rate.

Isn't the idea of smoothening suppose to spread out the returns such that they don't have to lower the interest rate/bonus unless it is prolonged.

In order to address this concern, it will be good to understand the differences between investing into the insurer's participating fund vs investing on your own (in this case, a balanced portfolio). Here is a general idea.

What is a participating fund?

When you buy an endowment policy, your premium is pooled together with the rest of the policyholders. Thereupon, it is invested into the insurer's participating fund - to generate return and to manage expenses, e.g. claim payout.

More Details: What is a Participating Fund Singapore

Generally, the participating fund's objective is to provide a stable return over the life of your endowment policy. When the need arise, the insurer will deploy "smoothing" to maintain the stability. Summing up, you get to enjoy additional returns (in the form of non-guaranteed bonuses) at a managed risk level - this risk is basically managed by the insurer.

More Details: Smoothing of Bonuses Singapore

Investing on your own

On the other hand, when you invest on your own, you are solely responsible for both the upside and downside in investment. With this in mind, one of the key questions is whether you possess the necessary knowledge, skills, experience, and time to manage the investment portfolio on your own? Of course, you can choose to invest your monies through a professional - target to yield above 2.5% per annum (based on your context).

At this point the question will be, what is the risk that you are willing and able to undertake to invest your money on your own and achieve this rate of return? This is especially important since the funds is for education - and you cannot delay the education time period, e.g. wait one more year because the market crashed.

Overall, I will suggest you to perform in depth calculation so that you become aware on the level of risk, and capital that you may use to achieve potentially higher return without jeopardising your financial objective.

Finally, nope - there is no way for you to terminate your policy without suffering from losses. Hence, I will suggest you to reorganise your finances instead.

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