View more on these topics

No room for complacency on 5% rule

No reference was made in the Chancellor&#39s Budget speech to the

recommendations made by Ron Sandler in his report last year to

abolish the 5 per cent tax-deferred withdrawal allowance for

non-qualifying life policies and also qualifying policy status. It

was left to the traditional Budget letter from the Inland Revenue to

the ABI to reveal the Government&#39s decision – or perhaps indecision –

in this area.

The Sandler report, published last June, stated that “the 5 per cent

withdrawal rule for life policies distorts the market because it is a

feature that does not apply to non-life policies and can distract

attention away from charges and investment performance”. It went on

to recommend that “the 5 per cent tax-deferred withdrawal rule for

life policies should be abolished for new business and replaced with

a rule (modelled on the previous partial disposal rule) that

reflected the economic reality of the withdrawal”.

It also recommended that “the concept of the qualifying life savings

policy should be abolished for new business and all new life savings

policies should be taxed in the same way (though pure protection

policies would still enjoy special tax treatment)”.

The industry has spent the last few months explaining to the

Government the impact of the changes and why they do not make sense

if saving is to be encouraged. They would hurt up to three million

savers, particularly the retired trying to get better returns without

having to grapple with tax complexities. Most of those affected are

smaller savers, on average paying £500 a year into qualifying

policies and withdrawing £1,200 a year from single-premium


They conflict with the Government&#39s saving strategy, first, by

penalising those on lower incomes, notably the elderly through their

entitlement to extra personal tax allowances, and second, by making a

popular savings product, valued by savers for its point-of-use

simplicity, more complicated and confusing.

They would increase the overall level of market distortion caused by

the tax system – a result contrary to Sandler&#39s aims. This is because

the tax treatment of insurance differs from that of other savings

products in many respects. Some differences give comparative

advantage, some are a disadvantage. Removing the advantages alone

would introduce a strong tax bias against insurance products.

The changes would worsen the savings gap. The tax simplicity of life

insurance is a key attraction for savers. Without it, savers are

likely to save less overall in asset-backed savings. Over the longer

term, asset-backed saving gives better returns, so this would worsen

pensioners&#39 incomes.

The insurance industry would be damaged at a time when it is already

under considerable strain. If the Sandler proposals were adopted,

sales of single-premium bonds, which now account for over 60 per cent

of retail life insurance business, could drop by a third. The impact

on some providers would be even more severe. Qualifying policies

account for over 40 per cent of the business of some friendly

societies. At the same time, the industry would have to find

£30m in the first year and £2m a year thereafter to meet

the costs of change.

Therefore, in its Budget letter, the Inland Revenue said that the

taxation of life policies will be considered as part of a wider

review of taxation of investments.

The letter stated that: “The changes recommended by Sandler to policy

holder taxation – abolition of qualifying policies and repeal of the

5 per cent rule – will not be taken forward in this year&#39s Finance

Bill. The Government recognises that these recommendations need to be

considered in the wider context of other tax issues affecting the

market for life insurance and other pooled investment products such

as unit trusts and Oeics. The Sandler recommendations will be

considered further within a wider framework that takes account of

ongoing regulatory change and other developments such as corporation

tax reform.”

It is important that advisers whose clients may benefit from the 5

per cent tax deferral allowance should not be complacent just because

there was no change in the recent Budget. It may be particularly

important for advisers to focus on using policies where enhanced

allocation rates are made available.


Flight flays political elite for persecuting advisers

Conservative Shadow Treasury Chief Secretary Howard Flight haslambasted the “politically correct establishment” for its repeatedvictimisation of IFAs over the last several years.Delivering the keynote speech to the LIA&#39s annual conference inLondon last week, Flight was scathing towards what he perceives asefforts by the political elite to get rid of IFAs but he welcomed thefact that […]

A consumer&#39s view

The recent landmark decision by the FSA on differential pay rises hasimportant implications for all employers and their pension advisers.The FSA has recently taken the brave step of awarding lower pay risesto staff who are members of its final-salary pension scheme in anattempt to head off total closure of the scheme.Within the FSA, only 900 […]

Headline news

Wednesday and it is a day of meetings in London and the launch of ournew business Onevoice which will bring communications and consultancyservices to financial services companies as well as across thefashion and music sectors.Since my big move to Leeds – and please no more references to flat capsor whippets – I have become a […]

Home truths for loan guru

On the wrong Home-track after the Headline money awards last week wasWrigles-worth Consultancy mortgage guru John Wriglesworth.The Diary learns that after the sound of gongs had died away, ourJohn piled into a taxi only to find out he had forgotten where helived.As a man who spends so much of the time watching movements in thehousing […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm