Flood warning on the endowments market

Sam Dunn finds too many sellers and too few buyers for Teps

Many homeowners are currently receiving their third reprojection letter from their endowment provider - and discovering that the threat of a shortfall when their policy matures hasn't gone away.

Many homeowners are currently receiving their third reprojection letter from their endowment provider - and discovering that the threat of a shortfall when their policy matures hasn't gone away.

It's no surprise, then, that an increasing number of policyholders are cashing in or surrendering their endowments and looking at other ways to raise the extra cash needed to pay off their mortgage - in some cases several thousand pounds.

Endowment holders have the option of selling their policies to a third party, via a traded endowment company. Usually known as market makers, these companies can get a better deal for their customers than if the policy had simply been surrendered to the provider - sometimes as much as 15 per cent more. But the success of the traded endowment market in recent years has come at a price: there is now a surplus of policies for sale, leading to poorer returns for policyholders.

Traded endowment policies (Teps) can be attractive to investors, who take them on and pay the premiums, giving them a guaranteed cash payout when the policy matures, along with any bonuses already locked in. And if the original policyholder dies while the Tep is still running, the life assurance element of the endowment is transferred to the new policyholder. Another attraction for Tep investors is that they avoid paying the costly set-up fees attached to the plans.

The Tep market has been in existence since the mid-19th century but took off in the 1980s in the wake of the housing boom. However, thanks to the stock market's current lacklustre performance, the prospects for future annual and terminal bonuses on endowment policies are looking increasingly gloomy. Meanwhile, the Tep market has become saturated with policyholders trying to sell up because of drastic projected endowment shortfalls.

"We were getting loads of offers [for Teps]," says Colin Jackson, director of independent financial adviser (IFA) Baronworth, "but we now get, say, one a day. Bonuses have been going down, people are not buying. [They are] waiting for bonuses to be declared next year." Market makers have a stock of unsold policies, he adds, and are taking a cautious approach.

Although the Tep market is valued at around £1bn, the actual volumes traded have fallen in the past 18 months. Instead of the 10 to 15 per cent extra they might have made by trading on the open market, policyholders are now receiving as little as 5 per cent more for their Teps than if they had surrendered them to the life insurer.

It is not just mortgage projection letters that lead endowment policyholders to sell up. In other cases, a change in personal circumstances, such as a divorce, may leave people needing to raise a large amount of cash. But John Turton, head of pensions and life assurance at IFA Bestinvest, thinks many choose to surrender or sell their policy for the wrong reasons.

"They don't understand how it works or how much it's [really] worth," he says. If a market maker is able to find a buyer for your policy, he points out, this suggests it is worth holding on to rather than selling.

If you really want to give up on your endowment, the first thing to do is ask the life insurance company how much you would get for surrendering it. Not all endowments can be sold; your policy must have been running for at least five years or one third of its full term, whichever is the longest.

If you can meet these criteria and know how much your insurer is willing to pay, you should contact at least two market makers to see if they can better the price. You shouldn't be charged for this.

Some policies are more desirable than others, and there is no guarantee that the price you are quoted by the market maker will be higher than the insurer's surrender value. But remember, you are under no obligation to accept an offer.

If you are in luck, you won't need to surrender to your insurer. The market maker's fee is usually factored into the price offered for the policy.

If you are considering buying a Tep, contact a market maker, such as Beale Dobie or Policy Portfolio, for a list of available policies. Alternatively, spread your risk by buying into a fund of Teps instead. Bestinvest's Mr Turton recommends Barclays Global Investors Endowment III, an investment trust full of second-hand endowment policies due to mature between 2009 and 2013.

Contact: Association of Policy Market Makers, tel: 020 7739 3949 or www.apmm.org