ABI calls on Treasury to retain tax breaks on endowment policies

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The Independent Online

The Association of British Insurers is today writing to the Chancellor, Gordon Brown, to plead for the Treasury to retain a tax break which currently applies to three million savers.

The Association of British Insurers is today writing to the Chancellor, Gordon Brown, to plead for the Treasury to retain a tax break which currently applies to three million savers.

The break is in danger of being abolished under proposals made by Ron Sandler, who was commissioned by the Treasury to investigate the retail savings market. Mr Sandler concluded that most ordinary savers do not understand the tax treatment of savings and that tax breaks do not encourage new saving.

In his recommendations, which look set to be taken on board by the Treasury, Mr Sandler suggested the abolition of tax allowances on life insurance policies, such as endowments, and bonds.

At the moment, endowment and income bond savers receive a lump sum from their policy when it matures free of tax.

Bond investors can also withdraw up to 5 per cent tax-free, a tax break that two million people take advantage of. These rules are set to disappear.

Many pensioners buy income bonds with some of their pension fund to boost their income. If the rules are changed as Mr Sandler suggests so that any income from a life insurance policy counts towards personal tax allowances, the ABI says more than 600,000 pensioners would face higher tax bills.

Mr Sandler hoped abolishing the tax rules would make saving easier to understand, but the ABI believes it will only serve to make the system more complicated for individuals, who will have to check the tax consequences of withdrawing money from their funds every year. The three million people that use life insurance to save would have to fill in a tax return every year.

Mary Francis, director general of the ABI, said: "The Government needs to introduce more incentives to save, not remove those that already exist. Ron Sandler's proposals were intended to make the tax for life policies simpler, but in fact they would make savings more complicated and less rewarding."

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