Investors find new life in old policies

TWO YEARS ago, Rob Lozowski, who played international rugby for England against Australia in 1984, laid his plans to move house. In the intervening period, he needed to boost his savings to put down a sizeable deposit on the property. But a building society account was not going to earn him enough. "With building society rates at 4 per cent, that wasn't an option. I didn't want the risk of shares. So in the end, the answer was a second-hand endowment policy. To be honest, I hadn't even heard of them before, but it has proved to be a good strategy,"Mr Lozowski said.

Not many investors are aware they can buy other people's endowment policies, with anything from two to ten years still to run.

But it can be a lucrative move, as Mr Lozowski discovered. He increased the return to more than 10 per cent a year and has already got his eye on his next house.

Despite mounting concern over the future of endowments as a way of paying off a mortgage, Mr Lozowski's case is fairly typical of people whose policies are maturing at present.

People who are drawn to this fast-growing investment area are normally risk-averse savers with money they do not want to touch for a few years. Often they are planning for retirement. Sometimes they want to pay school fees or buy a new home.

They have a huge range of second-hand endowment policies to choose from. Many are put on the market by people who are getting divorced and are selling their homes. All investors need to work out is when they want the second-hand policy to mature and how much money they have to tie up in it.

A typical example is a Prudential policy being sold by the Johnson Fry postal auction on 14 February in London. It is expected to be purchased for £9,850.

When the policy matures in nine years, the investor will make an estimated annual return of 13 per cent, which will come in a lump sum "capital gain". In the meantime, the purchaser must keep up a monthly premium of £18.

Had the original owner of the Prudential policy simply cashed it in or "surrendered" it, he or she would only have received £8,317. Standard Life, Scottish Amicable and Friends Provident policies often offer the best deals on the second-hand market.

Christopher Dobie, a partner in Beale Dobie, which buys and sells second-hand endowments, explained: "The best strategy is to buy more than one policy and to build up a portfolio. Many people buy five £10,000 second-hand policies that mature in consecutive years. That way, they spread their risk and get their money at regular intervals."

He added: "This kind of investment has good defensive qualities. The worst we have seen is someone get a 1 per cent return. But at the top end, people have got an annual return of 20 per cent.

"Normally it comes in at around 9-19 per cent, which is still far better than a building society, and it doesn't carry the risks of investing in Polly Peck shares," Mr Dobie said.

Over the past three years, many insurance companies have cut bonuses, which has meant that returns from second-hand policies has fallen.

Sammy Alexander, deputy managing director of Policy Portfolio, another dealer in second-hand policies, said: "Bonuses have fallen sharply in recent years, and they could fall further, but there is a big cushion built into each second-hand policy. Most are selling at discounts of between 12 and 14 per cent."

Even if bonuses fall steeply, an investor who has bought a policy that matures in three years will see his or her return fall from 12-14 per cent to around 10 per cent a year - still far better than building society rates.

Second-hand endowments can be bought in joint names of spouses or children, taking advantage of what might have been an otherwise unused capital gains tax allowance. Or they can be "gifted" to someone, avoiding tax altogether.

Max Rosen, managing director of a third dealer in such policies, Securitised Endowment Contracts (SEC), said: "If people maximise the use of their capital gains tax allowance, they shouldn't pay any tax at all on these investments."

Another, rather morbid potential cash benefit from these investments is that the person whose life is insured by the policy may die before it matures. This happens only in about 1 or 2 per cent of cases and means that the payment of the lump sum is brought forward, enhancing returns.

Policies can be bought through market makers, who take a commission. Another way is to contact an independent financial adviser, who can advise on which policies are most likely to deliver the best returns.

The adviser can also help to buy the policy from one of several specialist traders in this field, or at auction. H E Foster & Cranfield regularly holds auctions in London and other large cities. And Johnson Fry organises auctions where investors can sendin bids for policies by post or fax.