UK Traded Endowments to Invest

UK Traded Endowments as a form of alternative investment is gaining popularity in Singapore. MAS has allowed the distribution of Traded Endowments to retail investors since 2004. It involves investing in UK mortgage endowments where investors buy over (and service) the remaining term of endowment plans and seek to profit from the plans’ maturity value.

Mortgage endowments are basically endowment plan(s) bought by a homeowner to pay off the mortgage at the end of its interest-only loan. This was common in the UK where tax benefits made it attractive for such an arrangement. For more info, please visit Wiki link and FSA link. Midway into the endowment term, existing mortgage endowment owners may wish to ‘give up’ their plans for a variety of reasons e.g. their original property has been sold and they have no need for the plan; or there was a cashflow mismatch in terms of endowment returns’ projection versus loan repayment. Previously, most might opt to surrender their policies (which usually involved a huge loss) but they actually have another option of selling/trading their endowment for cash.

Sounds good? For offshore investors like us, there are risks to consider:

What is the worst case returns scenario? What if the UK insurer goes bust? Will I lose all my money?

1. It is possible to lose money.
2. UK insurers are assigned credit ratings by credit rating agencies e.g. S&P, Moodys. Shortlisted insurers typically carry at least single ‘A’ rating. One can check the long term credit rating of an insurer at S&P website.
3. Should the insurer become insolvent, up to 90% of claim monies (i.e. investment value, matured monies or death proceeds) are payable to the investor.
4. Since endowment maturity values depend on investment returns, the insurers’ earlier projection may not be realized. It is possible to reduce investment risk by opting for plans with its guaranteed minimum maturity more than the total investment (i.e. policy takeover price + sum of remaining premiums to pay).

What about the credit standing of local sales office i.e. TEP Pte Ltd?

Even if the local sales representative ceases operations, the contractual obligations of the investment remain standing from the UK insurer to you. At term maturity (or if the assured dies), the monies will still be paid out to the investor.

Will foreign exchange make me more or less money?

1. Foreign exchange concerns are a real risk, given that forex fluctuations can add on to investment gains or negate overall returns if the UK weakens substantially against SGD.
2. The British Pound has already weakened significantly against our Singapore Dollar during this financial crisis (see chart). It does seem that limited downside provides a window of opportunity for potential investors.

What are the considerations on tax and estate?

There are no capital gains tax for Singapore offshore investors. In terms of estate planning, one can will the investment to his/her beneficiary thus not an issue for asset distribution.

An example of a traded endowment offer looks like this [forex returns not taken into account]:

Insurer: Royal London ‘A-’

Maturity Date: 1 Jan 2018

Policy Price: 15,556 GBP

Monthly Premium: 61.34 GBP

Guaranteed Minimum Maturity: 22,225 GBP

Net Yield (based on Guaranteed Min Maturity): 0.43% pa

Projected Maturity: 40,303 GBP

Net Yield (projected): 8.98% pa