Offshore Investment TepsTraded endowment policies are increasingly seen as a useful investment tool. Francis Higney canvasses some expert opinion There has been a market in traded endowment policies for over one hundred and fifty years. Policies were originally only available in the UK for sale or purchase through auction houses such as Foster and Cranfield, who acted as broker by matching sellers to buyers. The market was narrowly based, very few auctions were held each year and appealed only to sophisticated sellers and buyers. Offshore Investment Teps & The MarketThe market, as we now understand it, was founded 12 years ago. It was Policy Portfolio who first pioneered the concept of market-making in the UK, acting as principle not as a broker - that is buying policies in their own right. This had major consequences. It made the market available and accessible to the general public, it became easier to understand and there was no longer a need to match buyers directly with sellers. Since market makers first became involved in traded endowment policies in 1988, the market has been driven by investors’ interest in buying policies to meet both specific and a wide range of future financial needs. The investment potential of TEPs is now recognised by an ever-expanding investing public and their professional advisers in the UK and overseas. Offshore Investment Teps - Exploiting The Rates Exploiting the rates
Increased investment returns are achieved by exploiting the difference between the loan interest rate and the potentially higher investment growth rates. This concept works particularly well in relation to the purchase of TEPs due to the pricing method applied. The policies are priced on the basis that if current bonus rates remain unaltered to maturity, returns would be expected to be between 9 per cent to 13.5 per cent per year. The current low interest rate environment, with base rates of approximately 6 per cent, makes borrowing on TEPs particularly attractive. Tracey Merritt, investment manager at execution-only TEPs market maker Beale Dobie, explains: “For example, an initial capital outlay of, say, £50,000 to invest in TEPs could be increased by borrowing £65,000, thus increasing the investment capital to £115,000. This would enable the purchase of a larger portfolio of investment in TEPs than would otherwise have been possible.” While the investment return exceeds the cost of borrowing, the investor gains the benefit of achieving investment returns not only on his own capital used for investment purposes, but also from the money borrowed. Offshore Investment Teps & The Market The market was initially worth around only £5 million a year. Since then volumes have risen substantially to about £400 million in 1999 with a potential market of about £1 billion. Those who need to dispose of their policies before they reach maturity are now able to sell to any one of a number of market makers. Investors in TEPs both in the UK and overseas have been attracted by the high level of security relative to their return and have found new financial planning uses for TEPs, while fund managers have devised a variety of investment vehicles for TEPs. While no responsible market maker in TEPs would ever encourage a policyholder to sell, there are circumstances in which someone has no choice. These include divorce, redundancy and emigration. Where disposal is the only realistic solution, policyholders need to investigate the consequences of selling a policy to a market maker instead of simply surrendering it back to the originating life company. Clearly there is a need to ensure that the seller receives the maximum amount he or she can obtain. On average, sellers can expect to receive from a market maker between 15 per cent and 20 per cent above the surrender value for suitable policies, and quite often even more. 
|
RSS Feed