New tax on endowments

Barnet_Pimpernel

The Daily Mail is carrying a story that the Chancellor has introduced a new (stealth) tax on savings policies such as endowments.

As I have kept up my underperforming endowment policy for 24years now, this would be a concern.

Is there any truth in their story?

dunstonh

Life funds have always been taxed at 20% but have been able to benefit from reliefs. Over the years I have seen figures banded about as low as 13% being the net effective rate to 18% being more typical. The type of asset being the key to the swing (fixed interest and property tended to be lower. Equity tended to be higher). Recently, one provider did state that 18% was the typical net effective rate on a typical mixed-asset portfolio. Providers could also carry back losses against gains.

The indexation allowance being frozen will reduce the relief but the reduction from 20% to 19% counters most of it.

In reality, the change is likely to be minimal. Royal London estimates the difference is around £25 to £50 per customer over the remaining term of their endowment policy.

If you consider the billions of pounds invested in life funds, the actual tax grab is quite large. That is why it made the media. However, in reality, the impact on the consumer is low. Plus, there are further reductions to CT coming up which will lower the impact or even remove it (its phasing down to 17%). However, those further reductions in CT don't appear to have made the media examples. They have focused on year 1 figures.