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A GOOD TIME FOR GUARANTEED ENDOWMENT POLICIES (Personal Finance Sept 1997)

With interest rates predicted to fall in the foreseeable future, and international stock markets at high levels, it is not a bad time to balance existing investment portfolios with the guaranteed endowment policies on offer from some of the Life Assurance companies. These are pure endowment policies (i.e. no life or risk benefits are attached) available for lump sum investments. The minimum (and recommended) term of the investment is five years after which time a guaranteed amount matures as a tax-free lump sum. The guaranteed maturity value is quoted at the time when the policy is taken out and takes into account current interest rates (much the same way as annuities are calculated).

At the time of writing, certain Assurers are offering effective rates of approximately 13,27% per annum. At first glance this does not seem that attractive, but when one calculates that it translates to a pre-tax return of 24,13% for a person on a 45% marginal tax rate, it becomes a sound investment, especially considering that it is guaranteed and therefore immune to possible stockmarket downturns or interest rate declines over the next five years.

On maturity these polices allow for various options including the option to continue with the policy without paying additional commission costs. At this stage the capital lump sum is tax free, the growth having being taxed in the hands of the Assurer during the investment period at the rate of 30%. One option is to leave the policy in place and withdraw the annual growth out of the policy as a tax free income which can be very advantageous, particularly for retirement planning.

With investors placing more and more of their funds into the unit trust market, it could be wise to complement these portfolios with a certain amount of low risk, guaranteed investment. Interested persons should act fairly swiftly as the effective rates on these policies may decline fast with falling interest rates. comment