Q: I am a fairly cautious investor and have for some time considered investing in a second-hand endowment [an insurance-based savings product that is often used in Britain to repay mortgages]. These seem to be a good way to gain market exposure without weathering the volatility of share-based investments. Just recently, however, I have heard of a new type of investment that is similar to an endowment, but requires only a one-off payment. It appears to guarantee returns of up to 11.56 per cent. Can you explain how these products work and how they differ from second-hand endowments? A: A guaranteed return on the scale of 11.56 per cent is clearly attractive when deposit rates are running at 5 per cent to 6 per cent, but something never comes for nothing. You would be wise to examine the details as there will nearly always be a high level of commitment required to obtain such a guarantee. The new products, known as 'with-profits bonds', require a lump-sum payment only and usually have an open-ended life. Bonuses are added throughout the bond's lifetime and at the 10-year point, there is a guarantee to return at least the initial investment upon encashment. Currently, high bonuses are being offered for the first year. In the second year and beyond the rate of bonus is variable. You should be aware, though, that if you liquidate your bond, you could find yourself paying some fairly hefty charges - both in the form of early-surrender penalties, which apply in the first five years, and in the form of a market-value adjustment, or MVA, which could be applied at any time during the life of the bond. In practice, the MVA allows the insurance company to penalise investors who withdraw their monies when investment conditions are poor. Second-hand endowments require a lump-sum payment and a commitment to pay a regular premium until the policy matures. A suitable maturity date can be selected at the time of purchase and could be from one to 20 years, or more, depending what suits you. As the previous policy owner has borne most of the set-up costs, it is usual to obtain a substantial discount on the real value of the policy. This can push the compounded annual return to maturity as high as 10.5 per cent. Each of the products has its attractions and drawbacks. Be clear on what you expect before committing your money. is a partner at Tresidder Tuohy & Partners (HK) Limited
