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Traded Endowments Taxation

An insurance company does not make deductions for personal tax before paying out the proceeds from a TEP, but tax is deducted from the company’s underlying investments before the bonus rates are declared.

By carefully structuring your investment there are many ways to help reduce or even eliminate personal tax liability.

For UK residents - TEP proceeds (whether at maturity, death of the life assured or resale of the policy) are normally liable only to Capital Gains Tax (CGT). Depending on your individual tax position, if a ‘non-qualifying’ TEP is chosen to meet your requirements, as a higher rate tax payer you may be liable to income tax on the proceeds instead of CGT.

NB - ‘non-qualifying’ means the policy has not been certified by the Inland Revenue to benefit from specific income tax exemption.

For overseas residents - tax treatment depends on the laws of the country of residence at the time the policy proceeds are paid. With careful planning, tax can often be avoided.

The minimum term for which an endowment policy can be arranged to avoid the possibility that there could be some tax liability on the proceeds is 10 years, which is why the minimum term for an endowment policy is normally 10 years. However, if you have changed the terms of your policy, perhaps by increasing the premiums, within the last 10 years there may also be some tax liability on the proceeds.

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Life assurance latest : Prudential, Resolution, RSA, Aviva, Gartmore

17/08/2010 - Company Reports, Endowments - 0 Comments - 440 words

Insurance firm Resolution intends to continue on the acquisition trail amonst insurance and life assurance companies and indicated that it hopes to add further businesses to its portfolio by the end of 2011.

Resolution bought the AXA UK life assurance business in June for £2.75bn and Friends Provident last year for £1.9bn and indicated that it would like add an asset management capability to its portfolio.

Resolution reported an operating profit of £203m after a £7m loss a year ago as new business profits jumped 153% at Friends Provident. Shareholder cash resources remained around £605m from £510m at the end of 2009.

Resolution added “the results reflect strong performances at Friends Provident International and Lombard while the UK continued to face difficulties, notably in the UK individual protection market. The UK results serve to reinforce the case for consolidation.”

Meanwhile, fund manager Gartmore have reported a 146% improvement in interim earnings before interest, tax, depreciation and amortisation although net sales came in below expectations.

Reflecting stock market investor dash for safety during the credit crunch Gartmore indicated that assets under management at end June were down at £19.9bn from £22.2bn previously. Gartmore earnings before deductions were £38.8m in first half, up from £15.8m at the interim stage of 2009.

Chief executive officer, Jeffrey Meyer added “We are focused on regaining momentum and believe we are attractively positioned to benefit from the continuing demand for absolute return products and the general growth potential of our UK Retail business." The group did not declare a dividend.

After Aviva rejected a £5bn bid interest from RSA last week, in companies general insurance businesses in the UK, Ireland and Canada. RSA has again made it clear that it believes a tie-up would make “strong strategic sense”.

Aviva, previously Norwich Union remains opposed to disinvesting its general and life insurance units and indicated that "highest value to shareholders will be delivered by retaining these businesses within the group”.

Pru chief executive Tidjane Thiam and chairman Harvey McGrath have thus far survived shareholders dissatisfaction after Prudential failed bid for AIG Asian Businesses - AIA cost company £380m in fees.

The Pru reported last week that Asia was a driving force behind a big increase in first half profit as the giant life assurance company remains confident of momentum being sustained for the rest of 2010.

Pru's operating profit before tax on European Embedded Value EEV basis rose 34% to £1.68bn in the six months to end June as new business profit came in 27% up at £892m and IFRS operating profit was 41% to £968m.

Latest life assurance company reports : Legal & General, Aviva, RSA Insurance Group

05/08/2010 - Company Reports, Endowments - 2 Comments - 534 words

UK second-biggest insurer Aviva has beaten analysts expectations reporting that first-half profit rose 21 percent as the life assurer indicated a consumer return to long-term savings products.

Operating profit rose to £1.27bn beating expectation of £1.17bn as net income rose to £1.08bn from £675mn a year earlier. Chief Executive Officer Andrew Moss added that Aviva “remains alert to the macroeconomic environment and risks in financial markets.”

Aviva indicated that it is increasing sales of life and pension products in Europe and following its main competitors Legal & General Group and Standard Life, selling products with fewer guarantees in an effort to reduce the amount of reserve capital.

Aviva also confirmed that it is renewing its strategic partnership with Royal Bank of Scotland RBS in a new distribution agreement with Aviva where RBS’s distribution network will sell Aviva protection and selective pension products.

RSA Insurance Group have also reported today a ‘resilient’ interim performance against a difficult first half for the insurance industry as profit before tax came in virtually unchanged at £302m from £301m last year.

Insurance industry sales quotient, net written premiums were reported up 9% at £3.80bn from £3.49bn in a comparable period in the first half of 2009 while RSA's combined operating ratio also improved to 94.8% from 93.5%.

The interim dividend was increased by 7% to 3.12p from 2.92p a year ago as Andy Haste, chief executive officer of RSA commented that “As it stands today, we continue to expect to achieve a combined operating ratio of around 95% for the full year... we expect the UK to remain in positive territory for the remainder of 2010 with Emerging Markets to return to double digit growth in 2011.”

Life assurance giant Legal & General LGEN yesterday reported interim figures ahead of expectations despite profit coming £589m in the first half of 2010 but down from £656m previously reported in a comparable period.

The city will react well to the news since Panmure Gordon had a figure of £572m at the top of the range of its market forecast. L&G also indicated that it cash on account at the end of June at £3.3bn, presently ahead of the life insurers regulatory capital requirements. Company also increased the half year dividend to 1.33p from 1.11p.

Legal & General chief executive Tim Breedon added “We remain on track to generate at least £600m of net cash in 2010... ee are optimistic about growth prospects in UK savings and annuities, though there is little evidence of recovery in the UK housing market.”

Meanwhile, there is sign of life back in the TEP market. For those that wish to redeem the value an endowment policy early, it is best to seek a quote from traded endowment brokers who can offer improvement over the life policy surrender value.

The market has recently been supressed with margins squeezed by the low interest environment of the last 18 months. However, TEP's or traded endowment policy surrender values appear to be back on the increase after experiencing a couple of years of stagnation, according to leading TEP brokers.

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Mortgage holders cheered as margins improve in traded endowment market

24/06/2010 - Endowments - 0 Comments - 257 words

Traded Endowment Policies : There exists a way to sell second hand with-profits life assurance policies in which traded endowment brokers find best deals from purchasing market makers.

The point is that the redemption value of old endowment policies mid-term is usually below expectation whilst there are investors who wish to buy old policies which can be transferred between holders and kept running under new ownership until maturity.

Life policy holders have an option to trade policies in before the end of the contract and the policy holders can get improved offers for the policy they hold via competitive bids from the TEP brokers - traded endowment brokers.

This facility of use to home buyers and sellers who need to change their mortgage as they sell and rebuy new homes.

The market has recently been supressed with margins squeezed by the low interest environment of the last 18 months. Brokers have been unable to offer enough margin to warrant trades taking place.

However, TEP's or traded endowment policy surrender values appear to be back on the increase after experiencing a couple of years of stagnation, according to leading TEP brokers.

Now is the time again to try to get increased value your old endowment. The worst you can do with an old policy is usual to simply surrender it back to the original life company to obtain redemption value. But thats what the TEP brokers can do for you - to evaluate your policy and make an improved offer.

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Taxation of TEPs

For UK taxpayers the tax treatment of TEPs will depend on whether the policy is 'qualifying' or 'non-qualifying'. In many cases no tax will need to be paid on the profits on maturity or earlier disposal. For overseas investors the proceeds of maturing policies are generally tax-free. This depends, however, on the country in which the investor resides.

For UK individuals (for trusts, pension schemes and corporate investors different tax considerations apply) the tax treatment is as follows:

Qualifying Policies - these are normally unaltered policies or those altered to mature 10 years from the date of alteration. Qualifying TEPs are subject to Capital Gains Tax rules.

Tax Treatment of 'Qualifying' TEPs:

  • Capital Gains Tax (CGT) is payable on any Capital Gain i.e. the maturity value less the purchase price and all premiums paid from the purchase date.
  • The resulting capital gain can be further reduced by taper relief (for TEPs purchased after 5th April 1998).
  • If after utilising CGT allowances (either single, or joint - if the TEP is bought in joint names) there is still a capital gain, it will be taxed at either 20% or 40% depending whether you pay basic or higher rates of tax.
  • Non-qualifying Policies - are usually policies altered to mature within 10 years of the policy alteration. Non-qualifying TEPs are taxed under income tax rules and are subject to 'top-slicing' relief. Quite often non-qualifying policies can be tax-free in the hands of basic rate taxpayers.
Tax Treatment of 'Non-Qualifying' TEPs:
  • The 'chargeable gain' is calculated by deducting the total premiums paid into the policy from inception (i.e. those paid by the original owner as well as the new owner) from the maturity value. This must take into account premium alterations.
  • Higher rate taxpayers are then charged tax on the amount of Chargeable Gain at the difference between higher and basic rates of tax.
  • For basic rate taxpayers the chargeable gain is divided by the number of whole years the policy has run. This figure is referred to as the 'top-slice'. The top-slice is added to all other taxable income received in the same tax year and if the resultant total income (including the slice) is below the higher rate tax threshold then no tax is payable on the total chargeable gain. If the top-slice results in the total taxable income exceeding the higher rate tax threshold, the proportion of the slice falling over the threshold is then applied to the total chargeable gain and this amount is subject to income tax at the difference between basic and higher rates.

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