Consumers holding endowments with a life protection element could be taxed when the policy matures, ...
Consumers holding endowments with a life protection element could be taxed when the policy matures, if Ron Sandler's proposals from his savings review go ahead.
In a bid to simplify investment products, Sandler has suggested qualifying life savings policies should be abolished, making all policies non-qualifying.
This means some consumers will pay tax on the investment growth of the endowment, ultimately leaving them with a smaller fund when the policy matures. Previously, endowments with a life protection element would have been tax-free on maturity.
Neil Southworth, research and development manager at Royal SunAlliance, explained: 'On a qualifying life policy, the life company pays the tax over the period of the policy then, when the qualifying policy matures, no further tax is paid. On a non- qualifying policy, the basic tax payer would be no different, but a higher-rate tax payer would pay 18% tax on the growth of the endowment when it matures.'
For those who face an endowment shortfall and are concerned about possible tax increases, Malcolm Tarling, spokesperson for the Association of British Insurers (ABI), advises them to sit tight.
He said: 'The endowment situation is currently under review and some companies are writing to policyholders to inform them what to do. The overall message is to hang on in there. The industry takes a long-term view and people do need to look at the long term.'
Despite an increase in tax for the higher rate payer and problems that may arise for those with a mortgage shortfall, Southworth agrees with Sandler's decision.
'When you think about the bigger picture, the Government is doing the right thing. Looking at the review, it suggests by simplifying the tax process, it shows people the best way to save,' he said.
