Why are policemen still buying endowments?

The Police Mutual Assurance Society (PMAS) Regular Savings Plan is an endowment policy targeted at members of the police force. And surprisingly (for an endowment) it continues to sell by the bucket load: 10,000 new policies were sold in 2009.

Does this mean the PMAS endowment is succeeding where others have failed? Or are our police men and women just financially naive?

The plan, which targets savings over a 10 to 30 year period, invests in the Police Mutual with-profits fund. The fund returned 7.2% last year and lost 9.4% in 2008, broadly in-line with what you’d expect from a fund that invests around two thirds in fixed interest and a third in stockmarkets (although the corporate bond exposure underperformed significantly last year compared to the wider market).

From the little information available it’s difficult to get excited about the quality of investment management on offer – PMAS decided to move about 10% of its fixed interest investments into stockmarkets towards the end of last year and early this year – just in time to catch the worst of the recent market falls...

But the main problems with this regular savings plan are those which affect most endowments – charges and inflexibility.

There’s a one-off £74 charge at the outset, followed by an annual charge of £12.90 and £14 on maturity. On top of this there’s a 0.5% annual fee plus charges for running the with-profits fund, which are not explicit.

According to the PMAS key features document, these charges would reduce a 5% annual return to just 2.5% if you were saving the £20 per month it seems to target.

PMAS’s own projections show that in the above example you’d get back less than you put in after 5 years (£1,305 contributions but only £1,190 policy value) and after 10 years your total return might be just £3,050 based on £2,610 of contributions – hardly worth it.

There is a guaranteed minimum payout of slightly more than your total contributions over the policy term, which you'll receive at maturity along with any added bonuses. And if you die meanwhile this sum will be paid out to your esate. But sell before maturity and you'll face a 5% penalty and the plan doesn't allow you to miss or skip monthly payments.

Returns are taxed internally at the basic rate of tax and there’s no further tax to pay at maturity. If you surrender the policy within 10 years and it hasn’t run at least three quarters of its term then you might face a tax bill, especially if a higher rate taxpayer.

Bottom line, avoid this plan. You’ll be lucky to earn a worthwhile return and there are much better savings vehicles on the market. For example, a cash or stocks & shares ISA is more tax efficient, offers far greater flexibility and, in the case if stocks & shares, a much wider investment choice. Plus it's likely to be better value.

Sadly, I can only conclude that the 10,000 police workers who were sold one of these policies last year have little idea what they’ve actually bought - else it's unlikely they'd have signed on the line.

Read the full review at http://www.candidmoney.com/candidreviews/review31.aspx