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Top up with a Tep

From September 1, the FSA has required life offices to inform policyholders who enquire about surrendering endowment policies that they may be able to obtain a higher price on the secondary market. This will increase the number and variety of Teps available to investors.

People are more worried about their future than they have been for a generation. The promises of a good quality of life in retirement are disappearing along with cash in pension pots and confidence in state provision.

We have just witnessed Standard Life – the bluest of blue-chip life companies and Europe&#39s biggest mutual – being forced to cut bonus rates on its with-profits policies and introducing exit penalties.

At the same time, more and more workers are being left to their own devices when it comes to planning for their future in old age as a growing number of organisations and companies, including some well known household names, close their final-salary schemes.

It all paints a pretty bleak future for many people and the pension industry itself. IFAs need considerable persuasive powers to convince clients to invest directly in today&#39s markets to secure their future well being. But Teps offer a way for IFAs to help clients boost the pension pot and offer relative safety from market fluctuations. Many IFAs are now advising clients to include Teps as part of the lowerrisk end of an investment portfolio.

Teps are policies sold by the policyholder before they reach maturity. Instead of being cashed in through the issuing life office, they are sold to market-makers operating a secondary market.

The Association of Policy Market Makers represents members who collectively account for by far the biggest proportion of the Tep market.

Market-makers buy policies only if they can beat surrender values offered by the life office. The policies are then sold to investors – usually advised by IFAs – who in the present market climate are increasingly looking for the avoidance of risk.

Many of the policies available have accrued bonuses attaching to them, which are higher than both the purchase price and the premiums due to maturity and provide the investor with a capital guarantee.

This characteristic, together with the potential for growth, make traded endowments a particularly suitable vehicle for investors, especially in the current market conditions where minimising risk is a key consideration.

Annual or reversionary bonuses continue to grow over the life of the policy and, once allocated to a policy, cannot be taken away, so they underpin the value of the policy. On maturity, policies usually have a terminal bonus added which together with the bonuses already accrued make up the total payout.

Despite recent reductions in bonus rates, traded endowments have continued to deliver returns considerably in excess of those of comparable investments.

The logic for including a Tep, or block of Teps, in an investment or retirement portfolio is straightforward – the accrued bonuses provide a quantifiable element of security and the product also offers choice, flexibility and potential for growth.

Their flexibility makes them particularly suitable for those seeking to supplement their retirement planning provision. Investors will usually receive a tax-free lump sum payout on maturity, which they can use for special events or as gifts for children and grandchildren and so on.

By investing in traded endowments, clients are able to add to their existing pension arrangements and ensure they are paid out at times which coincide with their income requirements by buying policies to mature at dates that suit them. A series of Teps can be purchased to provide phased returns over a period of years or at a time to suit the investor. This can also be critical for tax planning.

The use of Teps to supplement existing pension arrangements and for retirement planning is growing. Teps can be included in SSASs and Sipps. Research by market-maker Beale Dobie shows that over the last five years, while a primary reason for a Tep purchase was retirement planning, around one in 10 purchases was placed in a self-invested type pension.

Indeed, over the last two years, the number of Teps used in Sipps has risen by 60 per cent. As Teps can be purchased with a wide range of maturity dates, it makes them particularly suitable for use with Sipps, which may typically look for policies maturing over longer terms of 10 to 15 years.

This could make Teps appropriate for many clients approaching retirement who are looking for a low-risk element for their portfolio. While Teps are lower risk than direct equity investment, historically the returns on Teps compare very favourably with other low-risk investments such as with-profits bonds, corporate bonds, UK gilts and building society 90-day interest accounts.

Most pension schemes have a favourable tax status that enables trustees to receive capital gains and investment income free of tax. Likewise, the proceeds from Teps held within the pension wrapper are treated in the same way.

The present economic climate represents an opportunity for IFAs to suggest Teps to clients for whom they consider them appropriate or to reassess the value of Teps as stand-alone investments or as part of a wider investment or retirement portfolio.

Teps can supplement other investment vehicles used for retirement planning as they represent an additional ingredient towards achieving a balanced portfolio as well as being an additional source of post-retirement income.

Investors in Teps receive many benefits and have the ability to plan many years ahead – sound reasons for looking at Teps as an investment.

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