Traded Endowments: Britain's loss is Germany's gain

They're jumping up and down to buy our cast-off endowments. So should we get into the market, too?
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The Independent Online

Tens of thousands of Britons' rejected endowment policies are being given a new lease of life - in Germany.

In a record year for the industry, half a billion pounds' worth of our unwanted endowments were traded by German life and investment companies in the 12 months to April 2006, according to PolicyPlus, one of a dozen companies that buy and sell second-hand endowments, which are known as traded endowment plans or Teps.

"The Germans have managed to see the underlying value of a product that has been maligned in this country due to mis-selling and mortgage shortfalls," says David Carrington of PolicyPlus.

So why do the Germans - and not the Brits - find endowments so attractive?

The British side of the story is well documented. During years of high inflation, high interest rates and high stock market returns in the 1970s and 1980s, endowment policies invested in the stock market grew quickly and often paid out more than the initial sum assured.

Homeowners with endowment-backed mortgages could be left after 25 years with a handy cash bonus, besides paying off the original capital value of their property.

But trouble lay in store: as stock markets slowed, endowment holders were let down by hefty "front-loaded" (ie, upfront) charges, commission fees and wildly inflated projected returns. Having paid into a policy for years, some found themselves with negligible returns.

When, by the late 1990s, projections of shortfalls on the policies left millions of households unable to pay off their mortgages, the market for endowments fell off a cliff.

Mis-selling claims followed against the life companies involved, and the industry has largely struggled since.

Many homeowners with endowment mortgages switched to repayment mortgages, ensuring that both the interest on the loan and the capital value of their home would be paid down.

Several options are available to those left with a poorly performing endowment policy. They can surrender the endowment to the life company; stop paying monthly premiums but let the policy run its course; keep paying the premiums and hope their investment comes good eventually; or sell it on the Tep market.

Thanks to demand from Germany, this last option is becoming popular as prices rise.

All endowment policies have a guaranteed minimum payout element, which has proved tempting to many cautious German investors.

So long as the new buyers continue paying the policy's monthly premiums, they will benefit from a payout on maturity - with possible annual bonuses that are locked in along the way if the investment performs well.

Frank Creighton of Surrenda-link, a company that buys and sells Teps, says another reason Germans tend to prefer UK policies is because they give them greater exposure to equities than their own similar products. The large numbers of policies being put up for sale also helps keep the market moving, he adds.

So if they're good enough for the Germans, should Britons follow suit?

Buying a second-hand endowment can be rather like buying a used car, according to Colin Jackson of Baronworth Investment Services, which sells Teps to the highest bidders. Just as with a car, the first owner has taken the big depreciation hit, he says.

"In the case of an endowment policy, because the commission and charges are front-loaded, the original owner has taken the hit for all the costs, leaving the second-hand buyer to gain the benefit of the growth."

But potential buyers should still tread carefully. Tep market makers have a list of companies whose products they prefer to avoid: PolicyPlus's Mr Carrington, for example, would not trade an endowment from Eagle Star or Guardian Royal Exchange, as he considers their returns too poor. In fact, of the 87 with-profits life offices with endowment policies in the marketplace, he considers that 60 do not "represent good value".

On the other side of the coin, strong and solid policies are worth investing in. Those from Liverpool Victoria, Royal London, Wesleyan, Clerical Medical, Standard Life, the Norwich Union Group and Prudential consistently attract strong interest from a wide variety of buyers due to their consistent performance.

As for returns on a Tep, Surrenda-link calculates that, over the past 10 years, an average of 8.2 per cent is to be expected. In the same period, the UK "cautious managed fund" sector has produced average annual returns of 6.55 per cent, according to data provider Financial Express.

However, Anna Bowes of independent financial adviser Chase de Vere says returns might look attractive but individuals who already have balanced portfolios simply do not need Teps.

"If you've got equities, property, bonds and cash, then you have everything an [endowment] policy invests in. Why not just have a little faith in the investments you already hold?"

INVESTMENT TIPS

Fancy a slice of the sausage?

* Stick to big brand names: Liverpool Victoria, Royal London, Wesleyan, Clerical Medical, Standard Life, Norwich Union and Prudential.

* Take into account both the purchase price for the Tep and the ongoing monthly commitment to maintain the policy.

* Most market makers look for policies with between five and 12 years left to run and pay 10 to 15 per cent more than the surrender value paid by the life insurer.

* Before buying, take advice from an IFA who specialises in with-profits investments.

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