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Out of its element

Life insurance Isas seem to be forgotten about most of the year. Then, around March, they come under a great deal of scrutiny before being written off as too small to make any difference to individual savers.

It might perhaps be worth noting what few benefits insurance Isas have:

•They offer investment free from income tax and capital gains tax.

•Life insurance Isas have traditionally been considered a halfway house between cash and equities because most are invested in with-profits funds although a few may offer a unit-linked investment bond. With-profits funds typically offer an annual bonus which cannot be taken away. In theory, this bonus is slightly higher in an Isa due to the tax benefits compared with the same investment made outside an Isa wrapper.

•Investors could be eligible for a windfall if a mutual life company floats on the stockmarket or gets taken over.

In my view, the argument for life insurance Isas is weak and the case against them far outweighs their benefits.

•Despite what might look like huge tax savings, I have to question what material benefit they really have. Insurance bonds already have tax advantages outside an Isa wrapper. Investors do not have any personal liability to capital gains tax but are subject to income tax. However, the income tax liability only affects higher-rate taxpayers. Lower and basic-rate taxpayers would see no advantage in investing in an insurance Isa.

•Investment in a life company&#39s with-profits fund is designed to smooth the ups and downs of stockmarket movements by giving an annual bonus. However, these bonuses have fallen substantially in recent years following the downward spiral in the stockmarket, a trend which has also weakened the financial position of many life companies. Even if markets recover, life companies will look to replenish their reserves before increasing bonus rates, which could take many years.

Furthermore, the asset allocation of with-profits bonds has changed in that they invest a greater proportion of their assets in fixed interest than three years ago. If equity markets rallied, they would miss out on the rebound. This hardly makes new investment into a with-profits fund an attractive proposition in the current environment.

•A maximum limit of £1,000 a year is really a measly sum, too small to make a huge difference to an investor. The Government would have been better to offer this amount as part of the cash or stocks and shares element of the Isa.

•One should not be fooled into thinking that insurance Isas are designed to insure against death. As they typically offer 101 per cent of the value of the investment on death, I would not be surprised if this is the reason why some people invest but this is hardly a life policy to suit every individual&#39s needs.

•Finally, we could argue that the charges are high and any tax advantages on offer are clawed back in charges.

Some policies such as AMP Pearl&#39s Bonus Account and the CIS Platinum Plus Isa have implicit charges which are reflected in the bonus rate and are renowned for being high. The Druids Sheffield Friendly Society insurance Isa charges 3 per cent while the Forester Life Isa charges 2.75 per cent (no charge in the first year), which makes you question how worthwhile these investments are when bonus rates on some policies are currently in the region of 3 per cent.

Inland Revenue figures show that Isas had attracted £159.8bn by October 5, 2002. But only £0.7bn had been invested in the insurance component – a mere 0.4 per cent. This is not only embarrassing but serves to prove what a flop insurance Isas have been.

When the Government abolished Peps, that was one thing. Introducing Isas in April 1999 was another. But bringing in an insurance component was just typical of muddled Government thinking.


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