Profits without the problems?

The Holy Grail of relatively high returns coupled with low risk may be within reach - by buying a second-hand endowment.

That, at least, is the claim made by companies operating in the traded endowment market, where second-hand policies no longer needed by their original owners are bought and sold.

David Carrington, a director of Policy Plus, one such firm, estimates returns of between 10 and 12.5 per cent, depending on the level of capital invested. This, he says, compares well with similar risk profile products like with-profit bonds, which turn in around seven per cent.

With-profits endowment policies are usually sold alongside interest-only mortgages to help pay off capital on the loan. They offer a degree of exposure to the potential growth of equity markets, together with the protection of a "smoothing" effect which pays bonuses even in years with poor stock market performance. At maturity, endowments also receive a terminal bonus.

Some 25-year policies maturing recently have averaged annual growth of up to 13 to 14 per cent. However, endowments are also criticised for their inflexibility, forcing their owners to sell them midway through their term. A growing market has developed for such traded policies.

Investors in a traded endowment policy, or TEP, benefit from this performance plus terminal bonus, without having to spend large chunks of the first few years' premiums on initial charges. The second owner continues contributing premiums to the policy until the maturity date.

Traded endowments can be a tax-efficient form of investment, according to Sammy Rubin, managing director of TEP market maker Policy Portfolio. He says policies defined as "qualifying" are taxed as capital gains. They can be bought to mature to use up a specific year's CGT allowance. This currently stands at pounds 6,300, although a policy can belong to more than one person, using more than one allowance.

Policies defined as "non-qualifying" are taxed as income, but only at the higher marginal rate. So if one partner is earning at the lower and one at the higher rate, it makes sense to buy in the name of the lower paid.

If the original policyholder dies the endowment is supposed to be cashed in. The current owner receives the basic sum assured on the life of the first owner, plus bonuses accrued to date. In practice it is unlikely either the new owner or the insurer will find out about the assured's demise.

To purchase a TEP, contact a specialist market maker or an auctioneer. Market makers publish lists every two weeks, with details of products, discount rates and expected returns. It pays to shop around. Unless you're sure of what you want, consult an independent financial adviser to determine the best insurance company, the endowment with the most suitable term, and the most efficient tax arrangements.

q Market-makers: Kingswood 01743 344077; Policy Portfolio 0181 343 4567; Policy Plus 01225 466466; Beale Dobie 01621 851133. For a list of IFAs near you, call 0117 971 1177.