Like death and taxes, one of life’s guarantees these days is that with-profits endowment payouts will fall each year.
Because millions of policies are still in force and hundreds of billions of pounds are invested in them, not a year goes by when with-profits returns are not thrust into the spotlight by national newspapers and scrutinised for their seemingly low returns.
The UK’s with-profits market is massive and cannot be ignored. The FSA estimated in 2010 that there were 25m policyholders and £330bn in assets under management. While this figure is smaller than it was in the past, it is still more than half the size of the Investment Management Association’s total fund universe.
Before all the negative headlines dominated the coverage of this market, with-profits policies produced incredible returns. Historic results suggest the year 2000 was the high-water mark for maturity values, the average payout being £98,370 for a 25-year policy. Given the gross outlay was £15,000, this means annual growth of 13 per cent per annum.
But since 2001, maturity values have slowly fallen. This year an average 25-year policy pays out £36,563. All is not lost, of course.This maturity value still represents annual growth of 6.5 per cent, much better than cash and many equity investments.
Some people could be tempted to surrender their policies given the grim reading, but this might not be the prudent choice. With that in mind, this survey takes a deeper look at this year’s round of results.
Making comparisons
Table 1 compares the performance of 10, 15, 20 and 25-year with-profits endowments alongside other popular investments. As always, we are showing the returns for savings accounts, the IMA Mixed Investment 40-85% Shares and UK All Companies fund sectors, as well as UK equity tracker funds.
This Table provides a realistic look at how with-profits funds stack up to other options. While much of the criticism levied against endowment policies focuses on how returns today are much lower than they were in the past, this exercise puts the emphasis on what is happening today.
Helen Jones, commercial actuary at NFU Mutual, says the differences between today’s maturity values and those of yesteryear are related to economic circumstances. She says policies that matured in the past saw higher interest rates and different investment markets than those maturing today.
“If you look at that in context, interest rates are at 0.5 per cent and stock markets have fallen, investment returns are a lot lower,” Ms Jones says, adding that in the current climate, the strong returns from the old days are not possible.
