Buying second-hand may not be the best policy: Beware: 'used' endowments can bring disappointing returns

BUYERS of second-hand Standard Life endowment policies are being warned that they may get poor returns when policies mature.

Standard Life believes that anyone who pays more than the surrender value offered by the company - and that will be all purchasers of second-hand policies - will have paid too much.

In a letter being sent to all second-hand purchasers Standard Life says: 'Where a policy has been purchased from its original owner the overall return will depend not only on the bonuses declared but also on the purchase price paid.

'We must make it clear that, since the price paid is not under our control, we cannot be responsible if the eventual return, when the policy proceeds are taken, is considered to be unsatisfactory.'

The market in second-hand policies, which are either sold directly or at auctions, developed because investors were willing to pay a premium over the surrender value offered by the insurance companies.

Around 10 per cent of the pounds 600m worth of endowment policies cashed in last year were sold on to other investors rather than handed back to the issuing insurance company.

The surrender values offered by the insurers have in most cases improved over recent years in response to public pressure. And at the same time the bonuses paid on with-profits policies have been coming down sharply to reflect, belatedly, the fall in stock market returns.

Standard Life's payout on a full term 25-year policy taken out by a 29-year-old man paying pounds 30 a month has fallen from pounds 66,087 last February to pounds 63,394 this year. On a 10-year policy the fall is from pounds 7,672 to pounds 6,839.

The payout is made up of annual bonuses added each year and a final bonus, which this year made up nearly 60 per cent of the payout on a 25-year policy.

Standard Life is one of the best peformers and provides one of the better surrender returns for people who cash in early. But returns from all endowments are likely to slide further.

John Hylands, chief actuary at Standard Life, said people had been complaining about bonus reductions and some of these complaints came from those who had bought policies second hand. About 30 to 40 Standard Life policies are sold on the second-hand market each week.

'We are very happy for policies to stay in force,' said Mr Hylands. The life offices do not object to the second-hand market as it means that policies remain on the books and premiums continue to be paid. 'It saves us having to sell another policy,' he added.

He said that Standard Life offered fair value on surrender - the value of the investment built up so far minus the expenses incurred in selling the policy. So in theory any anyone paying any more than the surrender value is paying too much.

At an auction in London this week held by Foster & Cranfield, one Standard Life policy due to mature in 2001 had a current surrender value of pounds 5,100 and was sold for pounds 6,300. Another due to mature in 2003 with a current surrender of pounds 16,700 was sold for pounds 20,500.

Guy Enriques, the auctioneer, said: 'We have every sympathy with Standard Life. It is not part of their business to be torn off a strip by people who are disappointed. Buyers make assumptions that companies will maintain their bonuses to maturity, but that is not guaranteed.'

Isaac Rubin, managing director of Policy Portfolio, which has offered as much as 44 per cent over the surrender value for policies, said investing in an endowment had to be compared with alternative investments. Although bonuses were coming down, that had to be viewed in the light of falling interest rates.

He went on: 'If a policy has only five years to run we are allowed to project returns using current bonus rates in the same way that insurance companies can. Beyond five years we do not project.'

Dealers in second-hand policies have to use the industry standard rates - currently 7 and 10.5 per cent, but shortly to be dropped to 5 and 10 per cent - when dealing with terms over five years. They are not allowed to use current bonus rates.

Christopher Dobie, of Beale Dobie, which sells second-hand policies, said: 'We go out of our way to ensure that people are informed. But it is legitimate for Standard Life to say that the price is not in their control.'

His company is teaming up with BZW, Barclay's corporate finance arm, to launch an offshore fund with a 12-year life to invest in second-hand policies.

Kleinwort Benson launched the first investment trust investing in second-hand endowments six months ago. It is finding it difficult to invest the pounds 30m raised for the trust.

'We have not paid silly prices,' said Simon White, managing director of Kleinwort Benson Investment Trusts. 'That would be damaging to shareholders.

'Acceptances have been lower than we anticipated, perhaps because others are paying higher prices.'

He added that the assumptions and calculations needed to make sensible decisions about investing in the second hand policies were complex. The trust pays a fee to the agency which buys in the policies, so it does not pay the usual market-maker's mark-up.

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