Security of Capital
EVENTS on the Stock Exchange during-the last few months have caused investors radically to revise their ideas of investing money. In order to avoid the high rate of income-tax a way was sought to make or accumulate money free of that burden. Appreciation in the capital value of investments is not subject to income-tax, and therefore shares were bought mainly on their prospects of rising in price. Owing to the recovery from war- depressed quotations the plan for a long time produced generally good results, but obviously prices could not go on rising for ever, and last yes- came the debdcle.
Investors have learned that the prime consideration is security of capital. If part of one's capital is lost, income sooner or later must correspondingly diminish. For security of capital nothing excels a life assurance policy issued by a first-class office. British Government securi- ties may fall in price, and should a holder be forced by any reason to realize he may find his capital less than his anticipation. No first-class British life office has ever: failed to pay 20s. in the £ on its contracts.
To prevent a repetition of their losses of the past year investors have been advised to buy the shares of invest- ment trust companies on the ground that these under- takings can employ investment experts capable:of evading the pitfalls that beset the ordinary investor. The greatest trust companies in the world arc life assurance- companies. The funds of British life offices aggregate upwards of £800,000,000 and no investment trust com- pany approaches them in wealth. Their resources command the best investment talent and are extensive, enough to carry through any approved plan to successful completion.
For the average man, unversed in financial intricacies,, anxious to accumulate a " nest egg " for any purpose,; what more convenient or better method is available than, an endowment assurance maturing at the desired date ? The State itself encourages and favours life assurance by granting a rebate of income-tax in respect of the premiums paid. A man aged, say, 30 next birthday, may want to be absolutely sure of:having 11,000 at the end-of thirty years; The annual premium for a life endowment assurance for this amount will be about £24 10s., on which the income- tax rebate will be £2 9s., leaving £22 ls.-as the net premium payable.: The policy is a guarantee that at theappointed date not only will every penny paid in premium be available, without any deduction for depreciation, brokers' commission, transfer duties or .registration - fees, but in addition there will be net compound interest at the rate of about 8 per cent. Three per cent. free of -tax is equal to 3f per cent., subject to tax at 4s. in the £. The policyholder has not had to bother about investments, or to waste his time studying the doings of the Stock Exchange or instructing his brokers. All his energies have been free to devote to his own business.
Where money is being accumulated compound interest is a wonderful advantage. It is difficult for individual investors to keep their money automatically invested at compound interest. Even if the investment -be as much as £100 a year -the interest received at the end of the first year will be only £5 less tax, or £4 net. In the next twelve months £104 will have to be invested, and the interest -received will break 'into shillings and pence. Investing small odd sums is a troublesome matter, and to be relieved of the task is alone a great gain.
The example given above is a non-profit policy. This was chosen because we were assuming the case of a man who wished to be absolutely certain about his capital. If he is willing to take the small risk of sharing in the profits earned by the assurance company's experts he will probably do much better in the end. He can be sure of securing the return of his premiums intact, usually with the addition of a small amount of interest. Any amount beyond this will depend on the extent of the success of the operations of the life office.
Examples will furnish a guide to a large circle of possible assurants. -We will assume the maturity of the policies to be at age 60. The sum assured is £1,000 with profits. - For the man aged 35 the annual premium will be £40 lls. 8d., or, allowing for the income-tax rebate, £36 10s. 6d. net. According to the present rate of bonus distribution of the office selected the accumulated bonuses- on maturity will be £794, making the total sum receivable by , the policyholder £1,794. This represents net compound interest at the rate of nearly 5 per cent., equal to 61 per cent. gross.
For the man aged 25 the annual premium will be £27 18s. 4d., or less tax rebate £25 2s. 6d. Bonuses on maturity at the present scale would be £1,818, making the total sum receivable £2,318. This again represents a return of nearly 5 per cent. net compound interest, or 61 per cent. gross.
Where else can such yields be obtained with equal security ? A policy constitutes in itself a desirable investment without taking into account the valuable protection afforded in the event of the death of the policy- holder before maturity.