Traded endowment policies are an ideal instrument to accumulate capital for particular financial needs at a specific date in the future. Pension funds and retirement investment are some of the many financial planning uses for Teps.
Our research shows 33 per cent of policy sales relate to saving for retirement. The market in Teps has grown by nearly 60-fold in the past 10 years.
It is now much easier for a potential investor to buy in the volumes he or she might require and to select policies which best suit their requirements.
In addition, recent stockmarket volat-ility has given the market a renewed appeal as investors looking for long-term returns in addition to high levels of security in the form of guarantees are using Teps as an alternative means of investing for their future.
Teps are traditional with-profits endowment policies that the original policyholder has sold by absolute assignment of all future benefits. They are attractive to investors for a number of reasons, not least their minimum “locked-in” value.
This is because the basic sum assured and bonuses allocated at the time ofpurchase are guaranteed, that is, they are locked in and together are often more than the initial purchase price ofthe policy.
Tep investors can feel safe in the know-ledge, therefore, that there is a basebelow which the value of their investmentcannot fall. As such, they can be particularly useful for those looking for potentially good investment returns with a low risk rating.
Consideration is regularly given to Teps for short-term funding of tax-free cash or income-drawdown payments as part of an investment portfolio. This is particularly of interest to pension scheme trustees, whose primary objective is to maximise returns without taking any undue risks, managing cash-flow and ensuring sufficient assets are availableand readily realised at retirement.
Developments in this area include the Pensions Scheme Office granting permission for trusteesboth of small self-administered schemes and self-invested personal pensions to invest in Teps through a recognised market trader.
Many pension schemes take advantage of the opportunity to increase capital for investment by borrowing against the security of the Teps being purchased. This has the potential to enhance the investment return and provide a wider investment risk spread through a greater choice of policies.
This concept works particularly well in relation to the purchase of Teps as they offer excellent low-risk security to the lender which provides the credit facility.
A low-risk asset such as a Tep enables the lender to provide the investor with the benefit of competitive lending rates, a high level of lending against the security and the provision of a credit facility to purchase the Tep initially. This has the effect of reducing the investor's capital outlay to the minimum.
As the lender is confident in the growth which can be achieved by the Tep as an investment, they allow all interest and premiums to be rolled up into the loan, making this a very convenient single-package investment.
The reduction in levels of inflation and interest rates has had an impact on life office bonus rates and in turn the maturity returns achieved. It is important to consider the real return of investment achieved from Teps and whether they offer a more attractive investment opportunity than alternative investment products, which would also have been affected by a similar financial environment.
The returns from these policies, and therefore Teps, are “actuarially smoothed” by the life office, which avoids the highs and lows. So a policy's value grows steadily, which is particularly desirable when close to retirement. This enables a portfolio of investments to be structured to mature close to or at the planned retirement of the members.
The low-risk feature of Teps avoids the need to switch into cash deposits prior to retirement and thus increases the overall investment returns achievable from the investment portfolio. Arrangements can easily be made for the portfolio of Teps to mature over a number of years prior to retirement, phasing the retirement if required.
As pension schemes are usually funded over a long period, it is these longer-dated poli-cies which are most suitable for investing in such schemes.
To summarise, Teps offer many benefits to pension schemes, including:
Little or no downside risk due to the guaranteed minimum value at maturity formed by the basic sum assured and reversionary bonuses already declared which cannot be taken away.
The advantage of making a single lump-sum payment for the price and future premiums from the pension scheme's tax-exempt funds. A discount in lieu of interest is given when this option is chosen.
Longer-dated Teps are valued on a basis that produces an annualised rate of return in excess of 12 per cent should there be no change in bonus rates. Sensitivity tables specific to each Tep are provided to demonstrate the effect on potential yield of a range of increases or decreases in life office bonus rates.
Portfolio valuation service to provide an actuarial valuation for auditing purposes.
Teps should be considered for inclusion in any scheme as they offer pension fund trustees the opportunity to invest in a flexible, low-risk vehicle with the potential for high returns.
Beale Dobie offers a free guide on investing in Teps which can be obtained by phoning 01621 851133 or emailing email@example.com