No surrender: try a sale instead

You can sell your endowment policy second-hand. But there are complications, says Neil Baker

Savers who no longer need their with-profits endowments or cannot afford the payments are often disappointed when they discover that the cash-in value of the policy is much less than they expected.

It is sometimes possible to get more from the policy by selling it in a growing second-hand market instead of surrendering it to the company it was bought from. But after a court ruling last week, anyone considering such a move needs to shop around much more carefully.

The ruling, pushed through by the Office of Fair Trading, removes the 3 per cent ceiling on commissions currently paid to advisers who sell the policies on their clients' behalf.

The OFT argues that such a maximum commission restricts competition and works against a client's best interests. However, advisers argue that the effect of the OFT's move will be to force prices up, not down.

David Beale, a partner in Beale Dobie, a leading firm of second-hand endowment buyers and sellers, says: "Free competition among intermediaries usually leads to increased rather than reduced commission levels, so customers will ultimately lose out."

With-profits endowment policies are usually used to help pay off a mortgage. But only a third of policies taken out actually reach maturity. Some 30 per cent are cancelled in the first three years and 40 per cent are surrendered or sold.

If a policy is surrendered, the amount the holder gets back from the life company varies. But endowment policies are structured so that much of the value of the policy does not come until the last few years before it matures. This is partly because such policies attract heavy initial charges. Also a large part of a policy's final value is made up of a terminal bonus, paid only at the end of its life.

According to the Association of British Insurers, endowments worth pounds 5.5bn are surrendered each year. Not all of these are with-profits policies - the sort that are traded second hand - although an estimated pounds 700m worth might be.

Peter Thorne, of financial advisers Parker Jerome, says the extra amount raised depends on the individual policy but it could be around 15 to 20 per cent above the surrender value. Because they already have a guaranteed minimum value and initial charges have been paid off, second-hand policies are seen as a good buy.

Companies such as Beale Dobie, SEC Group and Absolute Assigned Policies organise a market, matching people who want to sell policies with investors who want to buy.

In the past, these market-making companies have agreed among themselves that they would not pay more than 3 per cent to financial advisers who bring in clients. But the OFT believes that a maximum commission would actually operate as a fixed standard. Its court action has led to market- makers giving an undertaking not to set commission levels in future.

David Beale says: "Our view is that 3 per cent is very reasonable but anything above that level ought to be questioned by the policyholder."

Policyholders aiming to sell their endowments must now ask their adviser what commission they are getting and shop around for advice if it seems too high.

Max Rosen, managing director of SEC, another endowment buyer and seller, says a further option is to by-pass financial advisers and go to market- makers directly. About 50 per cent of policyholders do this at present. Those tempted to follow this route should remember that market-makers are not able to give advice.

Selling a policy in the traded endowments market might not always be the best option. If you need money quickly or if you cannot afford to keep up payments, there are other alternatives:

Take out a loan against the policy. Even if you do not pay the loan off, the policy's final value, after all charges have been paid off, might be more than the current surrender value.

Make the policy "paid up". This means you stop paying premiums. The date of the payout stays the same and you will receive less.

If you still need a cash lump sum, surrender or sale are not the only options. Companies such as Foster & Cranfield regularly auction policies.

Association of Policy Market Makers: 0171 729 8854

Foster & Cranfield: 0171 608 1941

For an independent financial adviser near you, call IFA Promotions: 0117 971 1177.