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Press on with endowments

Endowments have had such a bad press recently that their attractions as

part of an investment portfolio may be permanently undermined.

Troy French & Partners partner Peter French says: “Recent journalistic

excess in the popular press condemning mortgage endowment policies out of

hand is leading to cancellation and surrendering of endowment policies,

frequently leaving no life cover or alternative means of paying the

mortgage at end or term.

“We know that many Peps have not been replaced with Isas dedicated to

mortgage repayment. It is a pity that assigned life cover has been allowed

to lapse as a precondition for a mortgage. That neglect must place many

vulnerable dependants at risk where cover has lapsed and the borrower

dies.”

French says criticism of endowments has reached such a crescendo that

their demise may become a self-fulfilling prophecy. Enough investors may be

put off endowments to decrease demand significantly and remove the

incentive for life offices to pay attractive bonuses to look good in league

tables.

Matthew Roche, of Surrenda-link, which buys and sells endowment policies,

says the debate is certain to continue for many months.

He says: “It is not for companies like Surrenda-link to comment on the

rights or the wrongs of the issue. But, whatever the reasons for the

revised projections, the latest wave of media reports means there are now

even more worried homeowners out there. For some, the concern may be great

enough for them to consider switching to a different mortgage option and

cashing in their endow- ment policies. It is important that policyholders

consider- ing this course of action should be informed of all the options

open to them.”

The worries of borrowers have been heightened with reports suggesting

millions of endowments may not pay off mortgages. All providers are

reviewing projections because the FSA has reduced the rates for

forecasting. Because of lower inflation and investment returns, the

projections now used are 4, 6 and 9 per cent.

But providers are delivering much higher returns. For example, Standard

Life is reporting 13.5 per cent annual growth on 25-year endowments

maturing this year.

French says it is important to judge endowments on the basis of their risk

profile – safe – and returns -steady – and not just on whether they are

likely to pay off a mortgage debt. An endowment may produce a good, solid

and safe return but be insufficient to pay off the whole of the sum owed.

He says: “It may not make any sense for homeowners to surrender policies

at a loss, especially if they do not have other means to pay off the

mortgage debt. There are alternatives which may be better, such as

converting to a repayment mortgage and keeping the endowment going.”

The traded endowment policy market seems to be staying buoyant. Barclays

Global Investors chairman Paul Seymour says: “Many life offices this year

have again declared reduced annual bonuses. This was expected following

warnings towards the end of last year. The reason lies mostly with the need

to establish bonus levels that are sustainable over the longer run in view

of investment returns that are expected to be lower.

“We should not lose sight of the large compounded returns generated by

major equity markets in recent years which will have significantly boosted

the asset shares of the stronger offices.

“These can be expected to be paid out in due course as terminal bonuses

are used to bring payouts into line with asset shares.”

Seymour says the stronger life offices continue to show good life and

pension business. “Moreover, in many cases it is reported this has not been

bought at the expense of lower margins,” he adds.

Pressure to rationalise the life industry continues as it gears up for

pressure on margins from stakeholder pensions. “Stronger offices will be

better positioned to develop the potential,” says Seymour. “There may be

increased pressure to merge.”

The recent turbulence in the UK equity market arose mainly from investors

forsaking old economy shares for technology stocks. But Seymour believes

this highlights the stability of Tep fund assets.

He says: “It is unlikely this will be the last year for bonus reductions

but I expect demand for Teps to remain buoyant while they represent good

value relative to other low-risk investments and while windfall gains are

in the news. I believe the smoothing process behind the bonus system will

ensure the steady upward climb in net asset value will continue.”

With-profits endowments are for those willing to invest for the long term.

Benefits include annual bonuses, which, once added, cannot be taken away,

provided premiums are paid to the end of the term. These bonuses mean

performance tends to be steady rather than volatile. There is also a

terminal bonus which can considerably enhance the return.

Teps have a high profit margin. Market-makers generally pay more than the

surrender value but can still sell at a profit to investors willing to keep

premiums going to enjoy the annual and terminal bonuses.

Critics says endowments may be past their expiry date. They are

inflexible, opaque rather than transparent and have high charges which

become punitive if the policy is surrendered early.

Beale Dobie director David Beale estimates more than 60,000 people a year

surrender a policy direct to the life office. “Had they offered it to the

assignment market, they would have fetched on average an additional 1,250,”

he says.

Beale says much could be done to ensure people take advice before

surrendering policies. PIA rules require IFAs to refer would-be surrenders

to the Tep market. Beale Dobie&#39s standard commission is 3 per cent on the

price paid for the policy.

IFAs may feel best advice means keeping the endow- ment going while

looking at other ways to make up a possible shortfall. The alternative

avenues may, in fact, include buying a mid-term Tep and/or converting to a

repayment mortgage.

Unlike some who have received a bad press recently, endowments may not be

quite as nasty as they have been made out to be.

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