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Fears that cutting 5% rule would prompt fire sale

The distribution of orphan assets and restructuring of with-profits together with the proposed removal of the 5 per cent rule could spark a fire sale and attract carpetbaggers, say IFAs and providers.

They say Sandler&#39s proposals will lead to an influx into with-profits funds from carpetbaggers and those investors looking to take advantage of the current tax regime.

Sandler&#39s review has already led Norwich Union to ann-ounce that it would reattribute its orphan assets, valued at £5bn at the end of 2001, a move which could spark potential windfalls. The removal of the 5 per cent rule, a principle feature of investment bonds for higher-rate taxpayers, could lead to a rush of buy-now-while-stocks-last investing.

The recommendations have led commentators to caution the FSA and Sandler to take care not to make statements that could have unintended consequences.

Hargreaves Lansdown head of research Mark Dampier says: “Removing the 5 per cent rule is potentially the death knell of with-profits as we know it. We could see a fire sale of investment bonds in the lead-up to its removal.”

NU chief actuary Mike Urmston says: “Reattribution of the inherited estate means that shareholders would have to raise capital to buy out the policyholders. There would be cash as in the Axa deal.”

Chartwell Investment associate director Patrick Connolly says: “As an IFA offering best advice, the fact that there could be a distribution of orphan assets is likely to be a consideration. But it is still not enough to make people invest in the current climate.”

Perspective, p28

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