Value Investing In Second hand Endowment Policies? Foreigners Love Them
October 2005
With all the bad news about endowment policies over the last several years it is interesting to note that the investors are taking an interest in second-hand mortgage policies. Especially as they can yield up to 8% a year.
It is also interesting to note that over 70% of second-hand endowment policies are being sold to European private investors, notably the Germans. The Europeans love the yields and have great confidence in British insurance companies which contrasts to how these companies are viewed by the domestic population.
What Are Traded Endowment Policies
Endowment policies were sold in the 1980s and 1990s as investment funds which made up part of a mortgage. Part of the monthly repayment for mortgage was invested into these funds which were supposed to offer superior returns over the long run. The returns it was claimed at the time would be used to repay part of the mortgage debt.
However, investment returns were inferior to those that were promoted and all sorts of problems arose, miss-selling complaints being the main one.
What Are Traded Endowment Policies
An endowment mortgage theoretically has two parts to it, the interest and the endowment policy. And because most endowment mortgages have had to be refinanced with other mortgages the original endowment policies are still in force and are able to be sold.
Hence Traded Endowment Policies, or Teps for short.
Which Investors Should Consider Teps?
- Teps are excellent investment vehicles for forward planning
- Investing in them should be considered by anyone who's doing - Pension planning, retirement planning or school fees which will be paid out over a long period of time
How Have Teps Performed?
Ironically Teps have actually performed pretty well over the years, it is just that the original performance potential was marketed at unrealistically high levels. And this is one of the reasons why investors especially the foreign ones are so keen on Teps because in the UK the words 'endowment' and 'under performance' go hand in hand.
In effect, the Europeans know nothing about the negative PR on endowments and instead they just focus on the yield, together with the fact that they are backed by well capitalised insurance firms.
Brokers in Teps suggest that a portfolio can yield between 6% and 8% per annum before tax. Teps can either be bought through specialist brokers or at auction.
Tax Implications
Profits on Teps are liable for capital gains tax when they mature. In the UK any profits can be set against the capital gains tax allowance of £8,500. It is significant to note that if Teps are held in a SIPP then profits are tax-free.
Are Teps Guaranteed
Guarantees are where the mechanics get complicated. Some schemes do carry a guaranteed minimum value but it is topics such as these where potential buyers should do far more research. Like with anything the investors in Teps who really understand the market will get the best prices and likely the best returns over time.
This short article is designed to alert you to the investment potential of Teps but not to advise you how to buy them, where to buy them or other such information.
The Safer Way to Invest in Teps
An alternative to researching the Teps market yourself and investing in individual policies is to purchase a fund that invests in a portfolio of Teps. Over the last year many of these funds have yielded 15% or more.
Summary
The returns on offer by investing in Teps look reasonably juicy. However, some financial advisers recommend caution with their argument being that there remains still too much uncertainty about future of bonus payments on the policies.
The other problem with investing in Teps is that one year ago the market was dormant and stagnating with generally low prices. But interest has really rocketed over the last year and this has had an effect with obvious price rises. Perhaps they is not the great level of value that there was a year ago.
However, for the diligent investor who is prepared to work at understanding the mechanics and the tip market in general is likely to be well rewarded.
See Also
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