`Tax Raid` on with-profits funds
(13/12/2004)
Endowment mortgage holders and pension savers could lose out if a move to increase the tax on surplus cash held in with-profits funds goes ahead.
The proposal, contained in last week`s pre-Budget report, would see the same tax rate apply to cash as shares held in with-profit funds.
The Treasury described the move as closing a `tax loophole.`
But Norwich Union, the UK`s largest insurer, said the change was a `piggy bank raid` that would damage savings.
Tax rise
Under Financial Services Authority (FSA) rules, with-profits funds are supposed to hold more assets than they have liabilities.
In order to ensure that they comply with this rule, many with-profits providers hold substantial amounts of surplus cash.
The tax changes would see this surplus cash taxed at 30% instead of the current 20%.
Gary Withers, chief executive of Norwich Union Life, said the move to increase the tax on cash held in with-profits funds would further damage the financial position of with-profits funds.
`This is simply a piggy bank raid on the funds which support our customers savings policies... While this may look like a tax on the company, it is essentially a policyholder tax.
`This proposal seems completely inappropriate at a time when we are trying to rebuild trust in the savings industry and get people to save.`
Bonus cuts
The with-profits concept has come under fire of late.
With-profits funds are supposed to `smooth` out the peaks and troughs of the stock market by storing up investment returns made in the good years in order to pay out to investors in the form of bonuses when markets suffer a downturn.
However, with-profits funds have struggled since the stock market falls of 2000 to early 2003.
As a result, most providers have had to cut bonuses paid to with-profits and endowment mortgage policyholders.
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