Life assurance sector will offer Irish consumers more choice and better deals after Budget fillip


New tax and disclosure regimes next year in the life assurance industry should mean more choice and better deals for Irish customers. But the Irish Insurance Federation is lobbying against tax changes announced in the Budget for foreign-based life assurers.

Changes in this market are afoot. From January 1st the 40 per cent tax on gains made on investments in foreign funds will be cut to 23 per cent - the same rate as will apply to gains from investments placed with Irish-based investment managers. The new "gross-roll" tax system means consumers will no longer pay tax each year on investment gains but will pay instead a once-off exit tax when the investment is encashed or reaches maturity. The longawaited Insurance Bill will require disclosure to customers of the commissions and charges on policies and surrender values. The Pensions Bill will introduce the proposed personal retirement savings accounts (PRSAs). The equalisation of the exit tax between Irish-based and foreign-based funds follows intensive lobbying by the Consumer Association of Ireland and threats of complaints to the EU in Brussels. But the Irish industry reacted swiftly to the Budget announcement. Because of the way the tax will be collected, the change will disadvantage Irish-based life assurers, it has warned.

When a policy is encashed Irish-based life assurers will have to deduct the tax at source before the funds are paid out to the policyholder. But foreign-based funds will be able to pay out the full fund encashment value to the policyholders who will be responsible for declaring and paying their own tax liability.

All policyholders will be liable for the same tax but the Irish industry has warned that the gross payout allowed to foreign funds would give unscrupulous investors an opportunity to evade tax.

"We want a level playing field. We are not looking for more favourable treatment for Irish-based funds. We want Mr McCreevy to amend his proposals in the Finance Bill. All companies should either pay out funds gross or all should levy the withholding tax. Otherwise Irish companies are at a disadvantage," said Mr Mike Kemp of the Irish Insurance Federation.

If the proposed system of tax collection remains in place, the IIF argues there should be a higher tax rate for gains on foreign investments. It contends that the Budget change will encourage investors to move into offshore funds for tax planning reasons. It argues that even compliant taxpayers will be able to delay paying their exit tax liability on gains from foreign-based investments for up to 15 months under the self-assessment system.

The new tax regime will make the Irish market more attractive to foreign funds. Because it is a relatively small market, foreign funds are not expected to flood in immediately. Some firms, such as Virgin, have already said they are interested and some funds already in the IFSC are expected to introduce niche products.

While some foreign-based companies are expected to show interest in the Irish market, a number of brokers and intermediaries are expected to look into what would be good for their clients and approach foreign companies with proposals to market some of their products in the Irish market.