SIB surrender terms under fire

THOUSANDS of investors in second-hand endowment policies could find themselves with smaller returns than expected - ironically, because of a new requirement designed to help savers by giving them more information.

The Securities and Investments Board, which regulates the industry, has insisted that insurance firms must disclose how much investors will receive if they surrender endowments before they mature.

The SIB believes some companies pay investors larger amounts at maturity - and boost their public profiles at the same time - by penalising savers who dispose of policies early.

The effect has been a growing second-hand endowment market, in which savers sell off endowments for up to 30 per cent more than a life company's surrender value. Buyers are gambling on the likelihood of a high final payout on maturity.

But some financial advisers said last week that if life companies paid more on early surrender, the money would have to come from what would otherwise be paid out at maturity. Second-hand investors would be worst affected, because they had paid relatively large amounts for policies.

David Scott, managing director of Weybourne Financial Services in Surrey, said: 'To improve surrenders in the short term will pull down long-term values. The ultimate value could be quite severely affected in some cases. There has been massaging of figures by some unscrupulous life offices over the years, in order to get more market share.'

Amanda Davidson, a partner at the advisers Holden Meehan, agreed final returns might be affected for second-hand policies. But, she added: 'Even with second-hand endowments, you are taking a gamble about future bonuses. Maybe people did not realise, but there was a risk factor involved. SIB's proposals always were part of that risk factor. They just have to accept it.'

Life companies are divided on the effect of the SIB's ruling. Ray Milne, a manager at Scottish Life, said that while some companies might raise their surrender payments, it would not change his office's policy: 'Those paying low figures may now pay closer to the average.

'For us, people who surrender early are in breach of their life assurance contract and should not be expecting a good return on early encashment.'

Tom King, general manager at Standard Life, agreed that some life offices were boosting final payouts by punishing early surrenders. 'The real question is whether the second-hand market is valuing policies properly,' he said.

'We believe that we give full and fair surrender values to our clients. Someone must believe we do not. What we don't want is hundreds of unhappy policy holders who discover too late that the returns they thought they were likely to get are not there.'

But Sammy Alexander, a director of Policy Portfolio, the longest-established company in the second-hand endowment market, said the SIB's report would have little or no effect. 'I disagree with the underlying notion that all maturity values are boosted at the expense of surrenders,' he said.