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CGT changes sound death knell for investment bonds, says Navigant
CGT changes could see insurance bond market drop by 10 per cent
Changes to capital gains tax could lead to surrenders of around 10 per cent of the current insurance bond market, research by Navigant Consulting has suggested.
The report, looking at CGT changes coming into force from 6 April, claims that collective investments have become more attractive than investment bonds as a result. On this basis it predicts the impact to this area of the market could include surrenders of around 10 per cent, valued at £20bn, along with a 20 per cent reduction in sales in 2008 alone, representing £4bn.
In addition to this, the research said the transfer of funds into alternatives from the investment bond market could result in further customer switching costs of up to £1bn.
Kenn Taylor, director, head of life and pensions for Navigant Consulting, said the changes to CGT could lead to the death of investment bonds with companies specialising in this area suffering as a consequence.
He said: "Providers in this area will feel the pinch particularly those who are sole providers of this product. There is concern that some advisers will use the opportunity to churn business so I expect the FSA to increase supervision of advisers on this matter."
"Of course, there will be an element of adapting to the changed circumstances as providers look to options such as increased focus on distribution channel strategy, review of product development and tighter cost controls."
Cause and effects: CGT changes
|
Players |
Effect |
|---|---|
|
Private equity bosses and owners of business assets |
Increase in CGT paid from 10% to 18% representing an 80% rise. |
|
Small businesses |
Entrepreneurs face rise from 10% to 18% |
|
Life assurance bond holders |
Loss of competitiveness as collective investments become more attractive as CGT falls from a maximum of 40% to a flat 18%. Also loss of taper relief |
| Asset-rich, cash poor individual investors | Lower rate taxpayers who realise a capital gain of over £9200 will also face the rise from 10 to 18% |
Source: Navigant Consulting
Greg Heath, managing director for Lancashire-based Derbyshire Booth Financial Management, said it was too early to tell how CGT changes had impacted on the sector, stating stock market volatility seemed to be taking precedent over any "tweeking of taxes."
He said: "Investment bonds are not dead in the water as they do still have certain tax advantages and should not just be written off. There is a certain amount of hype around this subject and this product may still be very suitable for certain clients.
"You have to be careful not to be too simplistic on this matter. Of course, there were people who looked to take advantage of the taper relief and had a nasty surprise however it is too soon to start estimating who will start transferring assets. It will take a while to filter through and, at the moment, stock market volatility appears to be taking more of a front seat."
