Investor confidence is at an all-time low, with the bear market biting ever harder. No wonder investors are scared to risk their capital.
The plight of IFAs is no better. With what confidence can they advise clients to invest? Into what type of investments should they recommend that clients put their savings?
The one thing that investors really want is protection. They may require a reasonable rate of return but that is secondary to capital protection. In my opinion, there is a product with a proven track record that meets both requirements – the traded endowment policy.
Investors looking for a low-risk dimension to their investment portfolio could find Teps attractive. Every policy has a guaranteed minimum value. When an investor buys a policy, he or she knows the purchase price, which is often less than the accumulated value of the sum assured and attaching bonuses. In many cases, the value of the policy exceeds the combined amount of the purchase price and premiums due to maturity so that, regardless of whether the life office ever issues a bonus again, the investor's capital is protected. That protection lies in the locked-in value of the bonuses, representing a total and real capital guarantee.
Table 1 (above) illustrates how the guarantee can exceed the purchase price or the combined purchase price and premiums to maturity.
In the current financial climate, risk-averse investors and their advisers may select policies on the basis of the value of the bonuses at the time of purchase relative to the price paid and premiums to maturity. Many Teps are extremely resilient to major bonus reductions and still produce an attractive return. On many policies, the reductions would need to be up to 100 per cent or more before investors obtained no yield.
Similarly, even with a 50 per cent reduction in bonus rates, many policies will still yield returns of around 4 to 7 per cent, as shown by the examples in Table 2 (above).
Many policies will produce a satisfactory return even where no terminal bonus is paid on maturity.
IFAs have rarely had an opportunity to advise on a product which has characteristics which are so appropriate for the current investment climate. But, regardless of the present climate, Teps also have other inbuilt characteristics, such as flexibility and choice, that make them particularly suitable for investors' financial needs.
Investors can choose from an extensive range of maturity dates, purchase prices and premium levels to suit their current circumstances and future expectations.
The ability to choose maturity dates that coincide with a future lifetime event means Teps can be used for a myriad of applications.
One of the most common uses of Teps is to top up retirement income. There is a major savings gap to be filled, fuelled by anxiety about possible pension shortfalls, uncertainty over the viability of many final-salary pension schemes and the lack of interest shown by both employers and employees in stakeholder plans.
Teps are a welcome solution as they can provide either a one-off boost to retirement income at a given point in time or on several planned occasions throughout retirement. Teps are also authorised for use in both Sipps and SSASs.
Since the start of the bear market, Teps have become even more attractive because of their special attributes. By investing in policies in which the accrued bonuses exceed the purchase price, investors are can retain their capital intact and have the potential to obtain satisfactory returns.
One specific attribute is that their value increases throughout their life as bonuses are regularly added to a policy until its maturity, whereas other types of investment can lose value.
Investors and their financial advisers should give Teps serious consideration when reviewing investment options, either to meet a basic investor requirement of asset allocation or to include in a balanced portfolio.