With-profits endowment holders are receiving thousands of pounds less for selling their plans on the open market, as more of them aim to encash poorly-performing investments or save money on their premiums.
Trading an endowment, either through a market maker or an auction house, is an option for policyholders if they are unhappy with the surrender value offered by their life office.
Policyholders used to be able to achieve about 15-18 per cent more than surrender values.
But selling on the open market has become a less attractive option as the rise in the numbers of sellers has driven down sale values.
For example, a Prudential policy maturing in 2015 achieved a 17 per cent sale price over surrender value in January 2008, while a similar policy traded in December only achieved 3 per cent over surrender value – a drop of about £2,000 between the start and end of the year.
“The premium over surrendering is now about 5-10 per cent which is low historically,” says Lynda Kennedy, managing director of Foster & Cranfield, the UK’s only auction house for traded endowment policies.
Kennedy says there has been a big increase in inquiries recently from policyholders, particularly as bonus rates on with-profits policies have been slashed.
“Of course with the news about the bonus rates being cut, people are thinking about their options,” says Kennedy.
But the market uncertainty is also hitting demand, and this is affecting bid values. “Unfortunately, we are not getting quite as many buyers because investors are not sure what the future holds for bonus rates,” adds Kennedy, who puts about
40 policies under the hammer at her weekly auction.
Marketmakers for traded policies – who match sellers to buyers – also report a downward trend in the margin above surrender values to 5-10 per cent. Pressure on household budgets is another factor forcing many to consider disposing of their policies, says Brian Goldstein of the Association of Policy Market Makers.
Policyholders considering a sale are advised to obtain a surrender value from their provider before getting a quote to sell their plan on the open market. They should also factor in the cost of replacing the life insurance element of the endowment policy, if that is still required. For example, selling a 25-year endowment with 10 years left to run may deliver a £2,000 uplift over the surrender value, but buying £25,000 worth of term insurance for a 50-year-old man would cost around £8 per month for 10 years – or £960 in total.
In spite of the uncertain economic outlook, Goldstein believes that bid values for traded policies will begin to stabilise, rather than continue to fall.
Traded endowment policies are bought by both private investors and institutions, who are attracted by locked-in bonuses. Maturity payouts are tax-free for foreign investors. Auctioneers and marketmakers will only trade in conventional with-profits endowments, and not unitised or pension policies.
