Endowments that beat the cost drag
Your support helps us to tell the story
From reproductive rights to climate change to Big Tech, The Independent is on the ground when the story is developing. Whether it's investigating the financials of Elon Musk's pro-Trump PAC or producing our latest documentary, 'The A Word', which shines a light on the American women fighting for reproductive rights, we know how important it is to parse out the facts from the messaging.
At such a critical moment in US history, we need reporters on the ground. Your donation allows us to keep sending journalists to speak to both sides of the story.
The Independent is trusted by Americans across the entire political spectrum. And unlike many other quality news outlets, we choose not to lock Americans out of our reporting and analysis with paywalls. We believe quality journalism should be available to everyone, paid for by those who can afford it.
Your support makes all the difference.AN INFALLIBLE guide to getting the best-performing endowment policy over the next 25 years is the personal finance equivalent of the philosopher's stone. Infinitely desirable, but it does not exist.
Until recently, investors and their advisers have had to rely on past performance as a guide to the future. The conventional table of best-performing insurance companies in the endowment policy market, compiled by Money Marketing, selects the funds that have made the most with a specimen investment of £20 a month over 25 years, a total of £6,000. The results vary, ranging from 10 per cent to 14 per cent a year growth, but in every case the investments, aided by a high rate of inflation averaging 9 per cent a year, would comfortably have paid off the mortgages they were linked to.
But as every O-level student of personal finance knows, past performance is no guide to the future. If that is true of unit trusts, which operate on a one-year time-scale, it is far more so of endowments policies that take 25 years to mature. Even the traditional "half-way house" at 10 years will include new and different financial situations, which even the fastest and most flexible investment managers cannot guarantee to anticipate.
It is increasingly likely, however, that in an era of low inflation, investments will grow much more slowly than in the past 25 years, and even the target 7.5 per cent a year compound growth insurance companies are allowed to project for illustration could be hard to achieve.
The new rules requiring the disclosure of commission charges from the start of this year has provided a second method of performance assessment. All companies are allowed to project the value of a regular monthly premium by the time the policy matures, assuming the investment grows at a standard compound rate of 7.5 per cent. But tables produced by The Exchange, a Woking-based independent data service supported by the leading insurers, show that after allowing for charges, the true yield on a 25-year policy would be reduced by 1-2 per cent each year. Put another way, the actual premiums now required from a non-smoking couple, both aged 25, to repay a £50,000 mortgage over 25 years, would vary from a low of £72.20 a month at Friends Provident to £83.29 per month at Scottish Mutual, and the total amount swallowed up in charges and expenses, also compounded at 7.5 per cent a year, would range from £11,200 to £20,600. Alternatively, a premium of £75 a month invested at 7.5 per cent compound over 25 years would pay the £50,000 mortgage with £2,000 to spare at Friends Provident, while General Accident would break even, and the remaining 13 policies would leave a shortfall ranging from a few hundred to £5,400, at Scottish Mutual.
But these examples only illustrate the effects of commission drag on a notional return of 7.5 per cent compound.
Individual companies might well still offset the effects of drag through a superior investment performance. For that there is no measure at all. The best proxy is to choose those companies with the highest ratio of free assets or surplus reserves after covering the liabilities that arise from their existing business.
This because the higher the free-asset ratio, the freer the company is to invest in shares that have been (and should remain?) the best long- term investment available.
Companies with lower free-asset ratios have to put a higher proportion into gilt-edged stocks to meet their cash-flow requirements, rather than seek long-term gain. It is not an infallible measure, but the best that can be devised.
Company returns to the DTI in December 1993 show a remarkably wide range - from 40 per cent at General Accident to 5 per cent at Eagle Star..
Best performers
Maturity pay-out on with-profit endowments over past 25 years. Male aged 30 paying £20 a month.
TOP TEN 1994
Company Payout Surrender
value %*
Tunbridge Wells 45,999 83
RNPFN 44,497 78
Gen Accident 43,759 83
Comm Union 43,586 84
Wesleyan 43,289 83
Standard Life 42,444 85
Scottish Mutual 42,018 77
AXA 41,861 85
Scottish Life 41,677 91
Royal London 41,252 82
*Surrender value 12 months early
Source: Money Marketing
Best performers
Maturity pay-out on with-profit endowments over past 10 years. Male aged 30 paying £35 a month.
TOP TEN 1994
Company Payout Surrender
value %
Swiss Life 8,543 61
Royal London 8,427 78
RNPFN 8,367 77
Tunbridge Wells 8,093 78
Equitable Life 7,992 79
Scot Mutual 7,930 77
Med Sickness 7,927 80
Comm Union 7,915 83
Friends Prov 7,829 73
Norwich Union 7,825 76
*Surrender value 12 months early
Source: Money Marketing
Total charges
For with-profit endowments to pay £50,000 mortgage over 25 years from now (non-smokers aged 25).
Company Charges
Friends Provident £11,200
General Accident £13,200
Scottish Provident £13,800
Legal & General £14,200
Sun Life £15,500
Scottish Widows £15,600
Scottish Amicable £13,800
Standard Life £16,200
Eagle Star Life £16,700
Clerical Medical £16,700
Axa Equity & Law £17,300
Norwich Union £18,200
Commercial Union £18,300
Scottish Life £19,100
Scottish Mutual £20,600
Maturity values
Values after 25 years from premium of £75 per month on £50,000 loan.
Company Values
Friends Provident £52,000
General Accident £50,000
Scottish Provident £49,700
Scottish Amicable £49,600
Legal & General £49,300
Sun Life £48,200
Standard Life £47,800
Eagle Star £47,400
Clerical Medical £47,400
Axa Equity & Law £47,000
Commercial Union £46,300
Norwich Union £46,300
Scottish Life £45,700
Royal Life £45,600
Scottish Mutual £44,600
Join our commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies
Comments