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Tep toe through the tumult

The past few weeks have seen yet another sharp fall in the UK stockmarket, with many billions of pounds being knocked off the price of shares in the wake of the tragic events of September 11. This is not the first time in the past year that investors have been on the receiving end of the consequences of volatility in equities.

As a result, many professional advisers and their clients have felt the need to reassess their investment objectives and to change the make-up of their portfolios. Inevitably, there have been those who have opted for a more cautious approach than previously. A number of major financial institutions have already introduced products with the more cautious investor in mind and IFAs have been recommending a variety of investment products which reflect the strong desire of investors to minimise risk. One such product is a traded endowment policy.

Recent action by the PIA/FSA has resulted in life companies being obliged to tell their policyholders that trading them on the secondary market is an alternative to surrender. The FSA&#39s initiative is not just good news for policyholders but it has also increased the number and variety of policies available to potential investors, not only increasing investor choice but also broadening the investor base.

During the extended bull market, investments linked to stockmarket performance often produced better returns than endowments. However, equity markets are, by definition, much more uncertain and, as we have just witnessed, can be extremely volatile. There are, therefore, advantages in overcoming the negative effects of volatility by investing in with-profits endowment policies.

Traded endowments are an ideal vehicle for building capital to meet financial needs at fixed points in time. They are frequently used to service requirements such as retirement, inheritance tax planning, 18th or 21st birthdays, school or university fees, etc or just as general savings.

The appeal of traded endowments lies in their ability to offer steady and continuing growth without the degree of risk associated with other investment vehicles. Those Teps bought through Policy Portfolio since 1988 and which matured during the two years ending September 2001 achieved an average annualised growth rate of 10.11 per cent. Gains from Teps can often be tax-free by using capital gains tax allowances.

Teps ideally suit the needs of investors requiring a combination of safety and security together with growth. Such investors are often wary of investing directly in stocks and shares or in equity-linked vehicles. Investors with these requirements are growing rapidly, partly as a result of September 11 and partly because of the uncertainty of more spectacular investments such as equities.

Those who choose to invest in a Tep can do so in the knowledge that, in most circumstances, they cannot lose their initial investment provided they continue to pay all premiums and keep the policy in force until maturity. This is because the basic sum assured and bonuses allocated at the time of purchase are guaranteed – they are “locked in” to that particular policy and cannot be taken away. In some cases they exceed the initial purchase price of the policy. In addition, the expenses incurred in the early years of the endowment&#39s term have nearly all been met by the original policyholder. Traded endowments are therefore popular as investments in their latter years when most of the investment growth takes place.

Teps are especially attractive for older investors, in particular those not able to buy policies on their own lives because of health problems, etc, as the new Tep owner becomes the beneficiary, and any restrictions remain with the original life assured. Another important benefit of Teps is their ability to provide investors with a lump sum at a time tailored to their specific needs as well as their availability at a wide range of prices to suit all pockets.

The practice of gearing a Tep investment has become increasingly popular both in the UK and overseas. Essentially, geared Teps are those purchased with the aid of a bank loan. Overseas and UK banks will often lend up to 90 per cent of the surrender value of the Tep, thus allowing investors to maximise the potential return on their investment by buying a bigger number of policies.

Through the loan, investors pay all costs and premiums for all the additional policies purchased. This means that, after paying the original capital outlay, all future policy premiums and all arrangement and management fees are paid from the loan account. As policies mature, the loan is reduced until finally paid off. Investors benefit from the maturity values of all remaining policies in the portfolio.

There has been little to equal the growth of the Tep market since its inception in 1988. In recent years, the market has achieved an average annual growth of some 15 per cent and is likely to grow significantly in the future, partly because of increasing awareness among the general public and IFAs and partly because the investment climate is likely to encourage a continuing trend towards safety and risk averse products such as Teps.

Tep funds have helped to enhance the appeal of the product as they are attractive to those investors preferring to purchase pooled investments.

Several collective investments have been launched in diversified Tep portfolios. The Kleinwort endowment policy investment trust was the first of its type and has been followed by a number of similar products. Pension fund managers, in particular, have been increasingly attracted to the market and now repre-sent a significant part of the total investment in traded endowments.

The market fulfils a very real need. Over the years, it has not only helped hundreds of thousands of people who needed to dispose of policies but has also enabled investors and their professional advisers to get a multiplicity of investment benefits – choice, security and flexibility, with the potential for growth.

The investment climate, currently and in the foreseeable future, is likely to remain uncertain and exacerbates the fears of the investing public. These conditions can often encourage the continuing flight to safety that has characterised the investment market in recent times and increase the demand for Teps,a product which represents solidity and stability in an unpredictable and insecure environment.


Kean Seager

Lives: Bristol with wife Janet and four childrenBorn: Lowestoft, Suffolk, 1951Education: Lowestoft Grammar then Kingston Polytechnic, BSc Honours degree in EconomicsCareer: 1973 to 1975: junior analyst with merchant bank Guinness Mahon, 1975 to 1976: analyst with stockbroker Messell & Co, 1976 to 1979: fund manager ICI Pensions, 1979 to 1982: manager of investment department RoyalWest […]

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