The ABI (Association of British Insurers) has written to the Chancellor of the Exchequer, Gordon Brown, pointing out that tax proposals being considered by the Treasury could hurt up to 3 million savers, many of whom are on modest incomes.

The tax changes in question would affect those who use life insurance savings policies either to build up a nest egg throughout their working lives or to supplement their pensions in retirement.

The changes were proposed last summer in Ron Sandler’s review of savings and may be under consideration for the Budget.

The effects, not fully explained in the Sandler report, include:

• Pensioners could face higher tax bills. Those affected include up to 600,000 pensioners currently getting extra personal allowances. Many them buy a single premium life policy with their retirement lump sums as a source of extra income. A typical policy costs £24,000, and produces an extra £1,200 a year. Under present tax rules that income can be taken without affecting the pensioner’s personal allowances. The new proposals would reduce the personal tax allowances for all those with total incomes ranging from £16,500 to £21,000.
• Saving would get more complicated. Everyone using life insurance to save would need to check the tax consequences of doing so – each year if they took any money out. At the moment this is only a problem for a few but up to 3 million people would be affected by Sandler’s proposals.

Mary Francis, Director General of the ABI said:

“To tackle the pension crisis, the Government needs to introduce more incentives to save, not remove those that already exist.”

“Ron Sandler’s proposals were intended to make the tax for life policies simpler, but in fact they would make savings more complicated and less rewarding.”