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Capital gains changes rain on life insurers’ parade

This has not been a good week for the life insurance industry which has been in talks with the Treasury to try and persuade the Government to rethink the introduction of a flat rate capital gains tax.

ABI member firms including Skandia, Prudential and Norwich Union met with the Treasury on Tuesday to put their case forward.

Although many of the life insurers have been cautious about the impact this could have on the bond market and the life industry, others have been more outspoken.

Norwich Union head of marketing for investments Richard Kelsall says: “It is fair to say we are concerned. I think financial advisers will be nervous about selling bonds now and this could be damaging to the life industry. There are not going to be any winners from the capital gains tax changes on the life insurance side.”

Life offices seem confident that they can change the Chancellor’s mind on this front by bringing the tax treatment of collectives into line with bonds in order to prevent product bias on the basis of tax differences.

Lehman Brothers estimates the impact of changes to capital gains tax in the pre-Budget report could wipe up to 10 per cent off the value of life companies in a worst-case scenario.

Lehman says Resolution, Standard Life, Legal & General and St James’s Place are most at risk because they are UK-facing and lack the global diversification of Aviva, Old Mutual and Prudential.

But life insurance analyst Ned Cazalet says the impact could be even worse and says half of all lump-sum new business is under threat following the PBR changes to CGT and the damage this will do to the insurance bond market.

The UK life industry writes £65bn of lump-sum new business each year and around half of this is bonds business, according to Cazalet. He estimates that the tax changes could also impact on the in-force bonds business which is worth £200bn-£250bn.

Cazalet says: “The impact of this on the life industry is massively greater than on share option schemes or private equity. Either the Government knew what they were doing and are being Machiavellian or they have no idea which begs questions about the competence of people who make legislation.”

But L&G wealth policy director Adrian Boulding says he thinks the impact has been overstated and that bonds are still a good product.

Onto personal accounts and someone has a bee in his bonnet about pensions minister Mike O’Brien’s comments.

In an interview with Money Marketing last week, O’Brien said he will not indemnify advisers against future compensation claims if consumers miss out on state benefits as a result of saving in personal accounts and blame the adviser.

Pension guru Steve Bee says if this is the case, then advisers should not give advice on personal accounts unless the Government includes a warning that investors could lose out by saving in the schemes.

Bee, who is head of pension strategy at Scottish Life, says: “I think advisers should steer clear of giving advice on these if the Government is not going to indemnify advisers. If this was a packet of cigarettes, it would have to say these are quite dangerous.”

O’Brien told Money Marketing: “Anybody who is giving financial advice will have to put in place the usual caveats. If you are saying to me, are we going to bankroll some financial advisers around the country to give various kinds of advice, then the answer is no.”

In other personal accounts news this week, the Government has announced that a consumer representative committee will work with the Personal Accounts Delivery Authority to advise the main board on consumer issues.

PADA non-executive director Jeannie Drake will chair the committee which will be made up of members from various consumer bodies including Which?, Citizens Advice, Financial Services Consumer Panel, the TUC and Age Concern.

And finally, a product update from Scottish Life which has launched an income release plan that allows investors to access their pension fund before retirement.

The plan provides a traditional income drawdown facility but also allows customers to withdraw tax-free lump sums without the need to take income and then continue to save for retirement.

The product also allows a client who elects to take planned income payments access to an income tap facility which transfers an agreed amount of money into a low risk fund, while the remainder of the portfolio continues to be invested for longer-term income and growth.

Scottish Life thinks the product will be popular with IFAs and says the annual management charge can be as low as 0.5 per cent.

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