Tax blow for with-profits bonds

WITH-profits bondholders are set to face more misery after the Government confirmed it intends to hike the tax on surplus cash held in life insurance funds.

The move is likely to lead to bondholders suffering more cuts to their annual pay-outs as insurers are forced to pay 30% tax on the funds rather than the current 10%.

With-profits savers have seen funds performing poorly since the beginning of the decade after the stock market began its downward spiral. It recovered during 2004 but savers have still seen cuts to annual payments during the latest bonus season.

The Treasury, which buried its intentions in the Budget documents, had originally planned to implement the increase in December after the Chancellor's Pre-Budget Report. However, it agreed to a consultation after strong opposition from the insurance industry.

Insurers use the surplus on the funds to invest in equities, but the Government feels they are unfairly benefiting from the returns earned from the cash.

NU Life chief executive Gary Withers said: 'As we said to the Treasury in December, this is simply a piggy bank raid on the funds that support our customers' savings policies.

'One of the most effective ways to destroy confidence in savings is to introduce arbitrary tax raids on savings vehicles. We will continue to oppose this stealth tax in the interests of protecting our customers.'

The company was backed by the Association of British Insurers, which said there was still time to influence the Treasury. He added it was 'determined' to prevent a rise in taxation.

Director of financial regulation and taxation Peter Vipond said: 'We remain very concerned about the Government's intentions in this area. This proposal would represent a significant extra charge on with-profits policyholders and contradict the Government's desire to encourage more saving in Britain.'