No mercy for the punter

Personal Finance
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The Independent Online
IT HAS been another bad week for savers and investors who search for certainty and security for their savings and investments and find only uncertainty and insecurity. Yet the Government seems hell-bent on undermining the housing market, guaranteed pensions and guaranteed investments in the interests of reducing public sector spending, and leaving unsophisticated punters at the mercy of market forces they do not understand or trust.

Independent research for the Department of the Environment confirms fears that mortgage protection policies designed to pay the interest for home- owners who lose their jobs will not adequately replace the Government's existing system of income support when that is reduced in October. The real test is what happens to borrowers who get into arrears on their mortgages, and the damning conclusion of the report is that less than a third of existing home-owners currently in default would have qualified for a private policy and fewer than one in 10 would have succeeded in claiming on existing policies.

Investors who have been sold guaranteed bonds promising minimum income or capital gains over the next five years well in excess of other investments are also entitled to feel slightly uneasy. The attraction of such investments is obvious because it offers small investors with a couple of thousand pounds the kind of returns which only a deposit of pounds 50,000 could earn in conventional deposits.

Guaranteed bonds worked initially because the life companies could ensure high returns by recycling funds through offshore reinsurance companies and use their expenses to reduce the tax liability. Since the Budget last November they have had to use an alternative route, buying options on gilt-edged stocks to provide the returns if the stock market fails to achieve the required gains. If the stock market performs adequately, the option is not used but in the meantime it has been a cheap safety net.

Traditionally, gains on gilts and options have not been subject to tax, but the Inland Revenue's implicit threat to tax the gains could undermine the investment which guarantees the guarantees. Although the principle of no retrospective legislation is long-established, business already written could also be caught if the option has to be exercised in future.

It is almost unthinkable that insurance companies would renege on the guarantees already given. But if the worst comes to the worst, they may have to rob their other policy-holders to underwrite the guarantees, and in the meantime they will either have to dilute their future guarantees or stop selling the product.

For good measure the High Court decision a week ago - which effectively allows independent financial advisers to ignore SIB advice to warn their clients who may have been mis-sold a personal pension - is likely to undermine confidence in the private pensions industry even further.

The IFAs argued that to warn their clients would invite claims, even if the advice subsequently proved satisfactory and would effectively invalidate their own personal indemnity policies, which are the only real source of the money to provide the compensation which may then be due.

This is a real problem because there may well be many thousands of personal pension holders, especially those tempted out of occupational pension schemes, who are unaware they may have a claim.

Presumably someone, somewhere, will find a way of squaring the circle, but in the meantime the public perception of an industry trying to wriggle out of its commitments can only be strengthened.

Meanwhile, financial advisers will have to err on the side of caution in making projections, and leave the personal pensions, which are urgently needed to replace state and company funding, looking even less attractive to a bemused and suspicious public.