Invest in TEP?

jillydun · 3 September 2005 at 2:19PM

We have been approached to invest a substantial large sum of money in TEP's with a company called 'INTEGRITY' which we understand is covered and fully endorsed by the Bank of Scotland and Newcastle Building Society.

What would be your advice on this possible venture and are there any risks involved ?

cheerfulcat · 3 September 2005 at 2:31PM

Hello, jillydun,

How do you mean, " approached " ? Do you mean that someone telephoned you and offered this investment opportunity?

dunstonh · 3 September 2005 at 5:19PM

There are a whole bunch of companies authorised by the FSA with integrity in the name. There is not a company just called "integrity".

You really need to understand how a TEP works. It is not risk free and the tax wrapper used and charges associated with it may not make it an efficient investment for everyone. I would certainly call it a niche product. Good for some and not for others. It really depends on the circumstances of the individual.

EdInvestor · 3 September 2005 at 5:32PM

Gosh, here they go again trying to recycle old endowments to new mug punters under a different name.:(

As if they didn't cause enough trouble the first time around.

jillydun · 3 September 2005 at 5:46PM

We were recommended to a financial advisor who sells the product, so maybe 'approached' was the wrong word to use. The 'package' sounds convincing and sounds suitable for our circumstances but is it an old product under new clothing? We were told that there's only in the range of another 18months left in being able to purchase what is probably available on the open market.

dunstonh · 3 September 2005 at 8:41PM

EdInvestor wrote:

Gosh, here they go again trying to recycle old endowments to new mug punters under a different name.:(

As if they didn't cause enough trouble the first time around.

ED obviously doenst understand the mechanisms behind these otherwise he wouldnt have posted that. Although the comment is understandable and not unexpected from anyone who doesnt have very good investment knowledge due to the links with endowments.

One thing to be cautious here is whether its a single TEP or a TEP fund that is being talked about. Both have pros and cons and shouldnt be mixed up. Can you clarify which it is?

Time is running out on these and 18 months would sound about right for new money. There is only a limited supply and that is going to slow up at some point. However, that shouldnt pursuade you any more or any less that its right for you. Check the terms of business issued to you from the advisor. Check they are independent and find out what costs are involved.

Once we know if its a TEP or TEP fund that is being discussed, we can clarify more info.

jillydun · 4 September 2005 at 9:02AM

Thanks for the advice Dunstonh, in answer to your question, we were told that we'd be buying a single TEP's. All I know at this moment is that BoS has 'backed' the product and only chooses the top 10 endowment companies. BoS advances us an overdraft against our property bond investments which allows purchase of these TEP's. Against the strength of the TEP's I can withdraw up to a cash sum of approx 10% of the value per annum. What seems to be attractive to me is this annual cash payout and possibly a full return at maturity with final bonuses attached. It's the same old situation, where I am retired with spare dosh and am trying to find somewhere to make a profit.

EdInvestor · 4 September 2005 at 4:11PM

Jillydun

First of all "TEP" stands for "traded endowment policy". This is a normal common or garden endowment, sold to people in the past usually in combination with a mortgage.When a person decides to get rid of it, and sells it to a broker ( making more money than if he had surrendered it to the life company), it's then called a "traded" endowment policy of TEP. The broker (after taking his profit out) is now trying to sell on this endowment, via the IFA ( who will also want to take HIS fee out), so by the time it gets to you, just exactly how expensive is this endowment going to be do you think? How much of its original value will be left for you?

It is occurs to you that the answer could be "not a lot", then you might not be far wrong.

Now there's another problem with these endowments.The reason why there won't be many of them about in future is because they have considerably lost their value and become very unpopular so the life insurers don't sell them any more, so there's no need to make their final payouts "competitive' (ie high). Brokers who bought the old ones are not buying any new ones as they are struggling to sell the ones they already have and the big TEP funds who bought hundreds of thousands of them in the past are closing down. This is because the endowment payouts are so much lower, investors are losing money and pulling out their funds.

So people who want to dump their non-performing endowments these days usually can't sell them, but must surrender them to the lifecos, so not many new TEPs are being created.Instad there is this pile of surplus old ones

What to do with them?

:idea:

jillydun wrote:

BoS advances us an overdraft against our property bond investments which allows purchase of these TEP's. Against the strength of the TEP's I can withdraw up to a cash sum of approx 10% of the value per annum.

Nice one to whoever thought up this idea, very good mug punter stuff.;)

Now jillydun please consider these points:

What interest rate will you be paying on this overdraft? How is the bank/IFA "valuing" the endowment? Most endowments these days are earning annual bonuses of 1-2% of the value of their guranteed sum assured if you're lucky.Thus, if you are withdrawing 10% p.a, where is the other 8-9% you are taking out coming from?

This will be a loan against the guaranteed value of the endowment on maturity, will it? So when it matures the GV will be used to pay off the loan?

What seems to be attractive to me is this annual cash payout and possibly a full return at maturity with final bonuses attached.

How do you expect to get a full return if you are taking out such a big amount of the capital via the bank overdraft?

THe next point is:Have you checked what is happening to final bonuses these days? They are disappearing fast. The likelihood is that by the time the endowment matures there will be no terminal bonus or a very small one. Here's a list of the variations in terminal bonus on some of the big companies' 25 year policies at the moment:

Clerical Medical 30%
CIS 143%
Standard Life 36%
Norwich Union (GenAcc) 22%
Norwich Union (original) 82%
Prudential 106%
Pearl nil
Friends Provident 17%

Are you confident your IFA will choose a top endowment for you? How would you know if he picked a duffer? Most TBs are still on a downward trend.Will they be still lower in 10 years' time? Which ones, if any, will go up?

If there is a TB, will it go to you, or will it be spent paying interest on the bank overdraft and /or charges on the investment bond ?

Quite frankly this sounds like one of the worst deals I've ever heard of.

I suggest you see if you can get answers to some of these questions from your IFA and if he has nothing satisfactory to say, ask him to think again.

dunstonh · 4 September 2005 at 10:31PM

Quite frankly this sounds like one of the worst deals I've ever heard of.

I dont want to sound like I am agreeing with the suitability because I am not. However, they can be attractive to certain individuals. So although Ed is negative about these in full, I would not go that far as I know some individuals who have gone down this route and done very nicely out of it. It certainly has the potential to be a bad deal. It also has the potential to be a good deal. Thats what investment risk is all about.

I do fear though that it would be a bit late now. Many of the offers were in the past were based with market value reductions taken into account. These are now being removed/reduced making surrender values increase. In turn this makes the saleability of the endowments less attractive. e.g. the person buying the TEP would have perhaps bought one for £10,000 when its current value was £16,000. They are buying that £6k difference and potential for growth in the remainder of the term. (in very simple terms). However, the gap has been decreasing and that makes these less attractive.

Individual TEPs do seem to be sold by specific companies who seem to focus on them. I'm not sure what sales process is used (i.e. full advice or presentation and direct offer. Latter offering limited liability). If I was going down this route I would only consider it on full advice basis.

TEP funds on the other hand havent been too bad at all. Although I am not keen (as i prefer portfolios with traditional asset classes), a fellow IFA has done a few which havent fallen below 0.67% a month and the monthly figure is very consistent (he told me about this on Friday). For a low/medium risk product, that isnt a bad return. However, to take advantage of these, I really think you need to be looking at a fairly chunky amount and be a higher rate tax payer to keep the costs down and have the tax advantages work in your favour.

So, in summary, be careful. Don't be negative against these as that would be wrong and these are still good for some. However, they will not set the world on fire and remember PAST PERFORMANCE IS NO INDICATION OF FUTURE RETURNS. So, take any past performance figures with a pinch of salt as many of the "past" TEPs would have been arranged on better terms. And make sure any discussions that take place are done on a full advice basis. Check the terms of business/initial disclosure documents first to make sure.

jillydun · 5 September 2005 at 1:23PM

Many thanks for the useful input. Much appreciated.
After what has been put forward it makes us uncomfortable. Looks as if we have missed the boat so to speak !
Thanks again.

Invest in TEP?

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