Personal Finance: Only one careful owner...

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The second-hand market for endowments is growing rapidly, but buyers still need to be cautious about prices

Investors who prefer the moderate risk profile of with-profit endowments do not have to start a long-term saving scheme themselves, or buy a with-profits bond.

Another option is to invest in a second-hand endowment, or "traded endowment policy" (TEP). Buying one is, in effect, a form of recycling: such policies are among a growing number sold by their previous owners instead of being surrendered back to the insurance company they were bought from in the first instance. The market for TEPs is now believed to be worth more than pounds 250m annually, up from a few tens of millions just a few years ago.

The logic of selling an endowment instead of surrendering it is simple. Doing so is likely to earn its holder anything up to 25 per cent more than an early surrender. But the price depends on the quality of the company and how long the policy has been in operation. Few prospective buyers will touch a policy that has run for less than seven years.

There are now more than a dozen companies, loosely flying under the banner of the Association of Policy Market Makers (APMM), which buy such policies. The price market-makers pay will depend on demand for a specific policy at that time, which means the amount paid can vary substantially.

Although market-makers hate having their time "wasted" by calculating a quote only for a seller to go elsewhere, it usually pays to shop around when disposing of an endowment.

There are firms prepared to "trawl" the market to obtain the best price on policyholders' behalf, including Baronworth Investment Services, a firm based in Ilford, Essex. A "trawler" will receive commission of up to 3 per cent for the policy it sells on policyholders' behalf, but you can ask if they will share some of that with you.

Alternatively, it is possible to auction a policy on the internet through Endowments Direct, subject to a pounds 250 sales commission fee.

Conversely, the advantage of buying a TEP is that large chunks of the investment are guaranteed as annual bonuses that cannot be taken away, while the expensive set-up costs of a policy have already been met by the original owner. Maturing 25-year policies are paying up to 14 per cent compound annual gains, although 10 to 12 per cent is far more likely for those bought in the second-hand market.

One advantage of TEPs is that, because they have a maturity date, they can be used to plan for eventualities some years ahead, such as university costs.

Capital-gains tax (CGT) may be paid on some policies. But it is possible to place the ownership of a policy in more than one name, using each person's pounds 6,800 exemption. Moreover, the Chancellor's announcement of a tapered CGT system should benefit TEP buyers, who are likely to retain their policies for several years.

However, last year the Institute of Actuaries (IoA), whose members calculate how much of a bonus to attach to policies, suggested that up to a fifth of private investors are being overcharged by between 15 and 20 per cent when they buy TEPs.

The IoA's stance was backed by Max Rosen, director of Securitised Endowment Contracts. Mr Rosen's firm actually sells such policies but he wants tighter controls on the assumed rates of growth investors are given when they are buying TEPs.

Richard Ross, chairman of AAP, another market-maker, was quoted as saying: "The current price reflects the strength of demand and the weakness of supply. Market-makers give an execution-only service and provide no advice, leaving the investor to make his own, usually informed assessment, or rely on a financial adviser."

Endowments Direct:

APMM: 0171-739 3949; Baronworth (Investment Services): 0181-518 1218