View more on these topics

TEPs: Three Teps to heaven

Even by Tep market standards – and this is a market that has expanded at a fairly impressive rate since the late 1980s – the last six months have been eventful.
Probably the most dramatic change has been the swing in the balance between supply and demand in the market. Of course, this turn-round has not happened overnight.
People have gradually become aware that they are likely to get more for their policy if they sell it than if they were to surrender it to the issuing life office. However, the trend has accelerated recently for a number of reasons.
In August 2001, the FSA announced its consultation paper 106. Building on guidelines already issued by the PIA in regulatory update 85, March 2001, CP106 addres-ses the issue of disclosure rules on Teps.
Life offices are already acting on the recommendation that holders of life policies, when seeking information on their surrender value, should be made aware that they may get more for the policy by selling instead. The obvious consequence of this has been an increase in the number of people approaching marketmakers to sell their endowment policies.
Reputable market-makers will not actually buy a policy unless they can beat the surrender value, so selling a policy represents better value for the seller.
Reduced bonus rates paid by life offices in recent years and the bad press that endowments have received as a consequence have also had an impact on the balance in the Tep market. Many life offices have already reduced their annual and terminal bonus rates for the year ending 2001, with the inevitable knock-on effect on final maturity values.
In fairness, life offices have had every reason to be prudent in their bonus rate declarations. The performance of their with-profits funds has not escaped the effects of declining markets, exacerbated by the events of September 11 – the result has been less of a surplus to distribute among policyholders.
Furthermore, on December 18 last year, the FSA made a statement, addressed at life offices, emphasising the importance of announcing rates that are in line with their ongoing financial soundness, and are a fair reflection of their ability to pay.
Some policyholders, realising they are not likely to achieve the returns they had originally hoped for, have become disillusioned with their endowment policies and made the decision to sell, further increasing supply. The good news for investors is that the increased availability of Teps has resulted in lower market prices.
Paradoxically, recent bonus rate reductions should also be considered as positive news for new investors, as they should ensure current rates will be sustainable in the future. The important thing to remember is that, because of the way Teps are priced, bonus rates need to be consistent rather than exceptional for anticipated returns to be realised.
All bonus rate announcements to date are taken into account when a price is set. And, of course, all the set-up charges will already have been borne by the original policyholder.
It is not surprising that, since September 11, interest in the Tep market has increased significantly. They are more attractive to investors in a time of extreme stockmarket volatility because their secure locked-in value means they offer exposure to equities but with a lower level of risk than a direct investment.
Teps are a particularly good investment in uncertain times, due to the process of smoothing, whereby life offices hold back excess assets during the good times to help maintain bonus payments in the bad times. This is designed to reduce the effect of short-term market fluctuations on maturity payouts.
A fact often overlooked is that real returns on Teps actually increased last year.
This is because inflation fell faster than gross returns on endowment policies.
Investors’ average rate of return on Teps maturing in 2001 was 8.28 per cent while inflation was 2.33 per cent. Thus, the real return (gross return minus inflation) was 5.95 per cent.
This compares with just 4.91 per cent in 1997, when markets generally were much stronger.
The wider choice of policies available makes it easier for an investor to find one to match their own specific requirements. Factors such as the issuing life office, time remaining until maturity, premiums outstanding, and the terminal bonus ratio, should all be considered.
Teps are more diverse than many people realise, and suitable policies can also be selected according to an investor’ own attitude to risk.
The more cautious investor will tend to go for a policy with a higher capital guarantee percentage. This is calculated as the sum assured, plus any attaching bonuses, taken as a percentage of the purchase price plus premiums payable to maturity. In other words, if the capital guarantee percentage is 100 per cent or higher, there is no risk of losing the capital invested.
Take the example of a Norwich Union policy currently available for sale. The life office may not currently be one of the top performers in the league tables but this is reflected in the price of the Tep. It offers a capital guarantee percentage of 100 per cent, with further upside potential.
Another market-wide phenomenon experienced in recent months is the increased volume of re-trading. That is selling a Tep before it reaches maturity. This trend highlights the liquidity of Teps as an investment, something many investors are unaware of. Although the typical investor still buys a Tep to hold until maturity, there is a healthy resale market.
All these factors lead to the conclusion that although this is not an easy time for investors generally, the outlook for the Tep market is very positive.
New investors will benefit from the combined impact of bonus rate announcements, that have taken an element of risk out of the market, and increased availability, resulting in a wider choice and better value for money.


Standard Life – 3 Year Buy-To-Let Fixed

Fixed term: 3 yearsFixed rate: 6.10%Minimum loan: £40,000Maximum loan: up to 80% of valuation subject to maximum £400,000 on single property, £500,000 on up to 5 rental propertiesIncome multiples: income must equal at least 9% of loan amount, subject to minimum principal income of £20,000 or £30,000 jointArrangement fee: £350 for single mortgage, £500 single […]

Packagers&#39 body aims to attract TMO and Pink

The new UK Association of Mortgage Packagers has set a deadline of one month to get the two biggest ind-ustry players on board.The trade body was est-ablished last month with the aim of giving packagers a means of lobbying the Government and regulators but the two biggest organisations, Pink Home Loans and The Mortgage Oper-ation, […]

Universal Building Society – 5 Fixed Year

Fixed term: 5 yearsFixed rate: 5.49% Minimum loan: £20,000Maximum loan: £350,000Income multiples: 3 times principal income, or 2.5 times joint incomeArrangement fee: £295Redemption fee: 4% of advance in first five yearsConditions: noneIntroducer&#39s fee: £100, negotiableTel: 0800 0288 383

76% of IFAs fear negative polar impact

Three-quarters of IFAs bel-ieve the proposed changes to the polarisation regime will negatively affect their businesses, according to a survey from the Insurance Marketing Department.Seventy-six per cent said they expected the negative impact to be major and only 14 per cent said they thought the changes would be beneficial to their businesses. Two-thirds of this […]


News and expert analysis straight to your inbox

Sign up


There is one comment at the moment, we would love to hear your opinion too.

  1. DTMl6p jwqmceppxwre, [url=]ooxpeamtwsuw[/url], [link=]bvwygqmhhvxr[/link],

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm