Norwich Union fixes bayonets for charge against with-profits tax

With-profits policyholders could see reductions in payouts for years ahead because of government moves to implement a new 30% tax rate on surplus assets of with-profits funds, Norwich Union says.

Provisions of the recent Pre-Budget mean providers such as NU, which have managed to maintain surplus assets despite the bear market in equities between 2001-3, will now be penalised, says the company’s chief actuary Mike Urmston.

“We got 72 hours to respond with no consultation. Not surprisingly, we’re a bit irritated about that.”

Currently, the tax rate averages 10% on such surpluses – the average of a 0% rate on pensions and a 20% rate on life, based on the assumption total surpluses represent pensions and life equally, Urmston says.

By hiking the rate to 30% overall, providers will see an impact on the equity backing ratio, with the lower sums left net of tax reducing the freedom to take equity stakes even when prices are good.

Not only does this hit providers that have not been forced to shift towards bonds, Urmston says, but it may also impact on the ability to write new business.

Because the change has been introduced on such a short timeframe, it means the industry has to respond as quickly as possible Urmston adds.

NU has already written to the Treasury, FSA and ABI on this issue, and it will be pursuing it further through media in order to strengthen its lobbying case.

”The Treasury may not have recognised the affect on consumers,” Urmston says.

While difficult to exactly quantify in terms of, say, reduced payouts over time to with-profits policyholders, it is certain there will be a marginal, long-term effect, he adds.