Endowment policies have suffered in recent years simply by association with the much criticised endowment mortgages that were widely sold in the 1980s and early 1990s. High initial charges, low returns and the cutting back of tax relief have all contributed to the poor value that many such mortgages represent. Anyone stuck with a unit-linked "endowment" is even worse off since they do not provide any of the benefits of a true endowment - smoothed out investment performance, guaranteed sums assured and the payment of annual and final bonuses.
As standalone investment products, endowment policies, if sold properly and held for their full term, can be a wise buy, as one Standard Life investor found out.
A client of the Dublin independent financial advisers, Moneywise, he took out a £40-a-month Standard Life endowment policy in 1972. At that time £40 represented the equivalent of an average week's wage but he was able to sustain the premiums until 1992 when the fund matured. The tax-free return was £60,200, or an annual yield slightly over 15 per cent. "Having no immediate need of the funds, and on our recommendation," explains Moneywise director, Mr Owen Morton, "he split the fund evenly for five years into a very safe An Post deposit, a safe Scottish Provident fund and an adventurous Standard Life fund. These investments are now valued at £26,700, £30,800 and £35,200 respectively, £92,700 aggregate with no attaching tax liability. And all for an investment of £40 per month for 20 years."
This example proves the longstanding theory that equities will always outperform deposits. Mr Morton makes the point that had the same money been invested simply to keep in line with an inflation average of 8.5 per cent over the period, it would have only produced a 20-year return of £38,500. The purpose behind splitting the £60,000 return in 1992 was to reduce risk and safeguard a certain amount of the capital. Such an investment mixture, suggests Mr Morton, "is arguably a better bet than a hit-or-miss tracker which sets out to provide equity-linked growth with no downside risk, but at a price". Trackers do not pay dividend income and too often these days involve long averaging out periods of the unit-price in the run up to maturity, he says.
In fairness, Mr Morton admits that had his client put the £60,000 into Irish Life's 1992 Equity Tracker he would have received £102,000 five years later. "The then tracker was a gem inasmuch as it had no currency hedge and no averaging clause, universal in modern versions." But with those features in place, and the same investment conditions, that tracker today would only produce slightly under 50 per cent growth. "I think for the sophisticated investor, a mix-and-match portfolio is likely to produce a healthier return overall."
