View more on these topics

The flexi factor

In the last 12 months, there seems to have been no shortage of endowment policyholders entering the Tep market.

Research by Surrenda-link reveals that a huge number of people in the UK are looking to cash in their policies.

The APMM claims that 70 per cent of all endowment policies are sold or surrendered and estimates the potential size of the market at £1.2bn.

The Tep market is evolving, with a move away from buying and selling individual Teps towards investment in Tep funds.

Once upon a time, a Tep buyer would typically be a wealthy individual but institutions are increasingly recognising the long-term investment opportunities offered by Teps.

The minimum investment level for certain funds has dropped to £5,000 and the opportunity to invest in a Tep fund is open to a whole new set of investors who can diversify their assets. The pooling and diversification of endowment policies within a fund reduces the risk of Tep investment still further.

A well managed fund spreads investment across a wide range of policies from a broad span of life offices. Unlike a diversified unit trust, the risk of a Tep fund is tempered by the guarantees (sum assured and declared reversionary bon-uses) attached to the Teps in that fund. It is recommended that investors consider Tep funds which have guarantees above the value of the fund so that the downside is limited by the level of the guarantees. This low-risk asset class is made even more attractive when you combine it with a range of complementary lowrisk asset classes, for example, property.

Hybrid funds can combine a strong capital growth record with better risk red-uction as the cycle in which the two asset classes react to economic changes is slightly different.

Research shows that, historically, the combined performance of a joint property and Teps portfolio would have been less volatile than a portfolio invested solely in property or Teps but with the same levels of expected return.

If planning for future expenditure such as university fees, a wedding or retirement, a fund with a fixed end date can help but it is not the only aspect.

Investing in highergrowth, low-risk multimulti-asset funds can be another option to traditional investment vehicles such as pensions and an alternative to Isas which are no longer as attractive as they once were.

Another appealing aspect of Tep funds is the possibility of windfalls which represent a significant potential gain.

Standard Life&#39s decision to vote on demutualisation makes this a very real possibility. If the vote in 2006 is in favour of demutualisation, this could result in an added bonus to all those holding a Standard Life policy. A big proportion of the endowment policies within several funds are issued by Standard Life.

In conclusion, the market has evolved to utilise the versatility of the Tep and, as with any market, it has to develop to keep alive. No one knows exactly what is around the corner, for example, the possible Standard life Life windfalls.

But along with the potential for good, the effects of the bad times must be kept to a minimum. This is exactly what a Tep fund is designed to do, with inbuilt guarantees to safeguard against a negative return.

With a proven track record, Teps are certainly an option worth investigating, particularly for cautious mid to long-term investors seeking an alternative investment vehicle.

The with-profit funds of the life offices have enjoyed strong performances over the last year and their asset spread spared them from the worst of the returns in the bear market.

This bodes well for the continuing reduction in market value adjusters and for future bonus rate decisions. We believe the Tep market will continue to grow as their flexibility enables development away from the traditional trading of the occasional policy.


Cable urges probe on mortgage cover

Liberal Democrat chief Treasury spokesman Vincent Cable is calling on the Government to toughen up on lenders selling payment protection insurance. Cable wants to see the Office of Fair Trading conduct a full-scale review into the PPI market. Cable has condemned big banks and a number of small brokers for taking advantage of weak rules, […]

Many a slip twixt pup and zip

Hello, everybody! Welcome to the Rainbow house, it&#39s time to play with Zippy, Bungle, George and Geoffrey. IFAs who, like the Diary, spent most of their formative years in front of a TV, will be intrigued to learn of Intelligent Finance&#39s connection to the cult series. IF&#39s new ad campaign uses the talents of a […]

Mortgages plc gets set for move on prime market

Sub-prime lender Mortgages plc is looking to move into the market for prime mortgages in the latter half of the year. The company currently does some near-prime lending through the Mutual Collective, a collection of building societies which buy new asset classes from Mortgages plc on pre-agreed terms. It also offers buy-to-let and right-to-buy products […]

Can policies survive the change of regulation?

IFAs have questioned whether with-profits policies can survive changes in the regulatory regime. Thomson&#39s Group head of research Andrew Miles doubts whether the black box which he says with-profits depends on can be sustained in the light of the regulatory demands for transparency. The IFA believes there is still a need for WP products because […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment