Ask Sindie: Can I put my old endowments in a personal pension?
After switching to a repayment mortgage, a reader asks how to invest the policies
Sunday 05 March 2006
Q: After switching from an endowment mortgage to a repayment deal late last year, I no longer need the three small endowment policies picked up over the years - two with Standard Life and one from Prudential, worth around £18,700 in total.
I'm planning to take out a self-invested personal pension (Sipp) and wonder whether - with the pension rule changes in April - I will be able to put these policies into it as an investment.
A: The approach of A-Day on 6 April, when a new flexible regime for pension saving will let you put away up to £215,000 a year and delay buying an annuity, has prompted a number of readers to get in touch about investing endowments that no longer back a mortgage.
These policies have been discredited in recent years by mis-selling scandals and poor returns in the wake of falling stock markets. That they will provide a payout at a set point in the future, however, makes them worthy of consideration as an alternative investment.
There are legal and tax complexities in putting endowments into a Sipp that will rule it out with most pension providers. It is possible, though, as long as the endowment is bought from a firm that trades in endowment policies and your Sipp provider has the software and flexibility to accept it as an investment.
So check first to make sure the firms you are considering for a Sipp will accept a traded endowment policy (TEP). For example, Sipp provider James Hay will let you invest a TEP, while independent financial adviser (IFA) Hargreaves Lansdown, which also offers these personal pensions, says it has ruled out Tep investments in Sipps - for now at least. The IFA argues that it wants to keep its product as simple and as cheap as possible.
Those Sipp providers that do accept Teps will usually levy higher annual charges than for other investments, so it is worth ringing around to compare and contrast.
As for the practicalities of getting an endowment into a Sipp, this is a roundabout process that involves going via a Tep provider such as PolicyPlus ( www.policyplus.com) or First Policy ( www.1stpolicy.co.uk). These firms buy endowments from homeowners who, like yourself, no longer need them - usually after switching from an interest-only to a repayment mortgage. They then sell them on to ordinary investors seeking an alternative investment that will pay out at a set point.
So in your case you could sell your three policies to one of these firms and, in turn, buy a Tep to put in your Sipp. Here, it can grow until the endowment matures some years in the future, and then release cash that can carry on growing free of capital gains tax in your Sipp.
However, there is one crucial point to note. You will need to buy the Tep - and then pay the continuing monthly premiums on the policy - using funds within your Sipp.
So if you don't have much in the way of money or assets ready to transfer into your Sipp later this year, it could be a big risk to have such a large percentage of your fund's money focused on this one investment.
If you do have enough assets to put into the fund, however, your choice will simply be a matter of being happy with the terms offered by the Sipp provider.
Of course, it will be a bonus if you can get a decent price for your three existing endowments and put the cash into your new pension fund.
A Tep company's selling point is that it should be able to beat the cash surrender price for an endowment offered by the life company - depending on how long the consumer has had it, which life firm it is with and its type.
For example, PolicyPlus will consider buying your endowments as long as they tick three boxes: they're with-profits policies that receive annual bonuses (and once paid, they can't be taken away); they're more than five years old; and they're each valued at £2,000 or more by your life company.
These are the most desirable endowments since investors like the potential for long-term returns.
(By comparison, unit-linked and unitised with-profits policies, which have surrender values very close to their long term value, are unattractive for resale, says PolicyPlus.)
So, assuming your policies fit this bill, a Tep provider could get you more for your policies than if you surrendered them to your life firms - Standard Life and Prudential.
Now, although the April changes have prompted the flurry of interest, it's worth noting that there are no special rule changes regarding putting a Tep into a Sipp; you can already do so.
For more information, log on to the website of the Association of Policy Market Makers, the professional body representing Tep providers, at www.apmm.org. It can also help you find a Sipp firm.
If you need help from our consumer champion, write to Sindie at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS or email email@example.com. We cannot return documents, give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given
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