Firms pull out of TEP market

Firms pull out of TEP market

A 170-year-old business has abandoned the traded endowment policy business, claiming recent reforms have killed off the sector.

London-based Foster & Cranfield has stopped organising auctions in endowment policies, claiming demand and supply has dwindled.

Lynda Kennedy, a director at Foster & Cranfield, said this was partly due to changes in how traded endowment policies were taxed, which led to a lack of transparency and attractiveness for investors.

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She said: “It is partly because of the government’s new tax rules about taxing the profits, and partly because the supply of with profits endowment policies has really dried up, and we do not find it profitable.

“The changes have had a detrimental effect on the market. We have been going since 1843 and we have had to stop trading in them because of the tax rules. We made representations to HMRC but it did not want to know.”

Ms Kennedy has had to resign as secretary of the Association of Policy Market Makers because her firm will no longer be a member. The firm is rebranding as HE Foster & Cranfield.

Worcestershire-based Neville James has also ceased acting as a TEP broker. The company is now focusing on IHT planning as well as EIS and SEIS.

The Finance Act 2013 made TEPs non-qualifying, which means investors who wanted to buy policies on the secondary market would be subject to income tax. Previously they were subject only to capital gains tax.

A TEP is an endowment policy – usually with profits – which an investor purchases from the original policyholder.

If an investor decides his endowment policy no longer suits his circumstances, he can surrender it or sell it on the open market. A TEP is valued-based on the sum assured and the anticipated bonuses which would be paid out, as well as the forecast terminal bonus based on current rates.

However, over the past 20 years, many insurance companies scaled back writing endowment policies. Most of the 100 firms that offered endowments either no longer sell them, partly because of natural consolidation among insurance companies, but also because of the inherent investment risk attached to them.

Initially, high actuarial projections, based on current market returns, meant distributors could quote low premiums on endowments, making them appear cheaper than traditional repayment mortgages. However, when the stock market stalled and interest rates fell, firms had to issue amber and red warning letters telling customers the policies were performing badly and may have a shortfall. This developed into the endowment crisis, which cost insurers an estimated £650m in compensation in 2002.

Trading endowments can be highly complicated, not just because of investment risk, but also because of the inherent life extension risk, as it is difficult to accurately predict life expectancy.

In addition to the life risk, there are other factors that make valuing TEPs complicated. For example, TEPs distributed to local investors are generally acquired overseas, so it is hard to ascertain the quality of the policy.