Insurance with an edge

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The insurance component is the unloved member of the ISA family. Little-known and often-misunderstood, it is largely ignored in favour of cash or equity ISAs.

The insurance component is the unloved member of the ISA family. Little-known and often-misunderstood, it is largely ignored in favour of cash or equity ISAs.

Insurance ISAs provide a tax-free link to the with-profits or managed funds of insurance companies. Bonuses are added, smoothing out fluctuations in the stock market. As with-profits funds invest in a mixture of assets - including cash, shares, fixed interest and property - they can be confusing.

Another problem is that insurance ISAs are not competitive as there are so few of them. "There is little pressure to keep charges down, so they can be an expensive way to invest," says Kesh Lilidhar of independent financial adviser (IFA) Bailey Beaumont Brown. One reason for this is that some insurers do not regard the maximum investment, £1,000, as cost effective.

Insurance ISAs also fare badly for transparency. "As the size of the bonus is determined by each company's actuary, the investor has no control over how much he or she will benefit," says Giles Piddock of IFA Baxter Fensham.

Insurance ISAs do have their attractions, however. Since with-profits funds seek to iron out the vagaries of the stock market, and guarantee that once bonuses are added they cannot be removed, they can be suitable for cautious investors who are still keen to make their money work harder than it would in a bank or building society savings account.

It is important to remember that the life product inside the ISA wrapper is intended for savings, rather than life cover. This wrapper covers a range of with-profits and unit-linked savings options. With-profits policies held in an ISA are free from capital gains tax or income tax.

The tax advantages of the ISA means the annual bonus could work out 0.5 per cent higher than if your investment was outside the wrapper, or perhaps 1 per cent a year taking into account the terminal bonus. Also the investment does not have to be held for 10 years, as it does with a qualifying life policy, to be exempt from CGT.

Axa Sun Life, Abbey National, Pearl Assurance, Britannic Assurance, Norwich Union and Tunbridge Wells Equitable all offer insurance ISAs, but CAT marks (low cost, easy access, simple terms) are rare. Axa Sun Life's insurance ISA carries one. The same principle for choosing any financial product applies: take independent advice.

Contacts: Axa Sun Life, 0800 608073; Abbey National, 0800 555100; Britannic Assurance, 01564 828888; Pearl Assurance, 0645 557788; Norwich Union, 0800-056 2450; Tunbridge Wells Equitable, 0800-585474.

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