What are the Benefits of Investing in TEPs? There are a number of benefits of investing in TEPs these are just a few: - One of the advantages of buying a TEP is that you are buying an investment where the ‘investment clock’ started ticking many years ago. Unlike investing in, for example, a unit trust where the ‘investment clock’ starts from the day you invest. The bonuses that have been added in the good years of high interest rates and good years of booming equity markets in the past are all guaranteed and along with the basic sum assured make up the locked-in value of a policy. Also, although terminal bonuses are only added at maturity (or on the earlier death of the life assured) and are not guaranteed, they are usually designed to increase the maturity value of the policy to ensure that the total paid at maturity represents the growth achieved in the Life Companies’ with profit fund less the expenses incurred over the term of the contract. Normally terminal bonuses tend to be higher for longer term policies and thus when a policy is purchased which started say, 15 or 20 years ago the new owner is potentially going to benefit from the investment performance achieved over that period.
- When purchased a TEP will have a lock-in value made up of the basic sum assured and the existing bonus additions, this amount is the guaranteed minimum the policy will pay out at maturity even if there are never any further bonuses declared. This means that a buyer knows what the downside risk is at outset. In some cases the guaranteed value will be higher than the purchase price plus the total remaining premiums meaning the investment cannot lose, the locked in value will also increase with each bonus addition. TEPs therefore provide a medium to low risk (or sometimes no risk) investment opportunity with the potential to achieve above average returns.
- TEPs can be purchased over investment terms to suit investors’ requirements. The range of policies normally available have maturity dates anywhere between 6 months and 20 years hence.
- Investors are not limited to the number of TEPs they can own or the amount that they can invest.
- Investing in TEPs offers the potential to improve the tax efficiency of an investor’s financial planning strategy (see section 4 of our Free TEP Guide).
- TEPs do not need to be held to maturity, they can usually be resold and this can sometimes improve investment returns (see risk warnings).
- Buying TEPs is relatively straightforward. Once the purchase price and legal fees are paid the policy is legally assigned to the buyer who arranges to pay future premiums normally by direct debit. It is sometimes possible to arrange to pay premiums as a lump sum, if this is preferred.
TEPs can be used for a variety of reasons, the following are just a few: - School/University fee planning. – Many parents find themselves in a situation where by the time they realise their child is going to a fee paying school or university it is too late to start a regular premium savings plan or to have an investment running long enough to overcome initial charges/early encashment penalties. A series of TEPs maturing at regular annual intervals can not only provide educational fees but can be arranged tax efficiently enabling the investor to fully utilise their annual Capital Gains Tax (CGT) allowance.
- Retirement Planning to boost income in retirement– In a similar way to above a series of TEPs can be purchased to mature in consecutive tax years to boost retirement income and utilise annual CGT allowances.
- Retirement Planning within pension schemes – TEPs are allowable trustee investments within Small Self Administered Schemes (SSAS’s) and Self Invested Personal Pension schemes (SIPPs).
- Funding Future Celebrations and Special Events – TEPs can be purchased to mature shortly before a special event (weddings, anniversaries etc.) to provide the necessary funding.
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