Posted by Flora Maudsley-Barton | June 30, 2012
The budget changes to maximum investment plans (MIP) or “How premier league footballers stay rich”
One of the Budget announcements that has left me very puzzled has been the attack on saving policies. Yes, the same sort of harmless savings policy that our parents used to use to save up for a windfall on our 21st birthday. Normal, regular savings, endowment policies that have, in one form or another been with us since the 1774 Life Assurance Act.
Endowment policies are qualifying endowment policies if:
- they begin with a fixed term of at least 10 years,
- include life assurance of at least ¾ of the total premiums payable over the period (less for people over 55, by 2% for each full year over age 55)
- premiums don’t go up or down too much. They are allowed to increase a bit, but are not allowed to double over the period of the policy, nor are they allowed to drop too much.
“Qualifying” means that the policy proceeds are not liable to tax. That make sense really, because your endowment policy that repaid the mortgage, or gave little Johnny a lump sum on his 21st birthday were not taxed.
This doesn’t sound like the most exciting end of tax planning. However, in recent years, there are fewer and fewer opportunities to shelter savings from tax. After using our ISA allowance and pension contributions, the Extremely Rich are quite short of opportunities.
So, if you are lucky enough to have an extremely high disposable income, and lucky enough to predict that income for at least 7 ½ years, you can save up that disposable income into a regular savings policy and after 7 ½ years, its proceeds aren’t taxed. By the way, you might notice a discrepancy, I said 10 years earlier and now I have said 7 ½ years. What’s the difference? The other rule of a qualifying policy is that premiums have to be maintained for at least three-quarters of the fixed policy term. This means that if your policy was 10 years to begin with, it becomes qualifying after only 7 ½ years.
Instead of the £75 per month that you might have saved into an endowment policy to repay the mortgage, imagine for a moment that your monthly premium is £100,000, that’s £twelve million over ten years. You can imagine how useful that could be, and how much more scope there is to shelter tax, than if you only use the ISA and the pension. You still have got Venture Capital Trusts and Enterprise Investment Schemes to shelter some money from tax but these generally are really high risk and don’t suit many people.
What the Chancellor did about this was to drop down the maximum premium that can go into new plans from the unlimited premium, which was only limited to the amount the insurance company would say yes to. Now the limit is £3,600 per year. There are transitional arrangements for people who had taken out a plan just before the Budget. And, of course, plans that were in place before the Budget are exempt from the new rules, provided that the policy holders don’t make any changes that might attempt to overload the policy with premiums, to make the most of its qualifying status.
What I really don’t understand is why bother to go to such lengths, given that it will take at least 7 ½ years before the public purse is deprived of these proceeds. Admittedly, the numbers are quite big at the other end. It will, of course, upset the insurance companies a lot sooner but I am sure that can’t have been the motivation.
If you do have one of these saving endowment policies, they have different names with different insurance companies. The main providers of Maximum Investment Plans I’m aware of are Zurich, Skandia, Friends Provident, Ascentric and Transact. Yours might be called a Maximum Investment Plan (MIP) or a Versatile Investment Plan or a Flexible Investment Plan or an Adaptable Investment Plan or a Qualifying Savings Plan. If you have one, and it’s a good one, you might want to think very carefully before you make any amendments to it.