Sovereign backs insurance bonds

Insurance bonds can still be a valuable investment tool and should not be ig-nored by financial planners, according to Mike Newton, director of Sovereign Funds Management.

Insurance bonds can still be a valuable investment tool and should not be ig-nored by financial planners, according to Mike Newton, director of Sovereign Funds Management.

For several years insurance bonds have been out of favour in the retail funds management industry, suffering net outflows each successive quarter.

However, Newton says Sovereign insurance bonds have shown positive net gains over the same period.

"It's been very trendy for financial advisers not to use insurance bonds but they have their place and should be considered as part of an investment portfo-lio," Newton says.

Newton says insurance bonds are simple, can be tax effective for those in the top bracket and offer flexibility in estate planning.

"Also if Labour come into power at the next election and raise the top income tax rate to 39 cents as they have promised, insurance bonds will become more fa-vourable," Newton says.

However, David van Schaardenburg, head of research firm IPAC, says insurance bonds as a product type in the retail funds industry will continue to decline.

"By and large insurance bonds are not that tax effective and not particularly consumer friendly. As an investment type they will become increasingly sidelined and in a few years will probably be thought of as an esoteric product," van Schaardenburg says.

He says insurance bonds have been declining both in total and as a proportion of the market for at least four years. Currently insurance bonds make up $2.5 bil-lion of the $16 billion retail funds industry.

"I don't see any reason why that decline won't continue."

He says most companies are looking to close or rationalise their insurance bond products with only Sovereign continuing to be active in that market.

The Investment Savings and Insurance Association (ISI) has presented its tax re-form proposals to the leaders of the major political parties as a platfom for discussion.

Head of the ISI, Vance Arkinstall, says a series of meetings with politicians from the major parties has been scheduled to look at the issues highlighted by the ISI tax report.

Tax reform is looming as one of the big issues of this year's general election due in November.

The ISI is also liaising with the Inland Revenue Department (IRD) in an investi-gation of the tax position of life insurance companies.

"The IRD is investigating the assumptions life insurance companies make when de-claring tax liabilities," Arkinstall says.

"It may want to institute practice standards or it might seek legislative changes."

He says the Government actuary will soon release a report looking at tax on life companies which should "be some guide on the issues".

The IRD is also considering whether financial advisers are liable to pay with-holding tax on their income or need to seek an exemption from doing so.

"I'm surprised the IRD see this as an issue as I'm sure all adviser income would be declared in one way or another," Arkinstall says.

A leading economic research body, the New Zealand Institute of Economic Research (NZIER), has expressed support for a compulsory retirement savings system.

Director of the NZIER, Alex Sundakov, says the combination of New Zealand's worsening current account deficit and the aging population is creating a danger-ous situation for future generations.

"The current account deficit problem and the ageing population will lead to high taxes on the young in the future," Sundakov says.

He says higher taxes will cause young people to leave the country and further decimate the tax base.

Economic data produced by the NZIER indicating a fall in New Zealanders' savings levels and net worth has led the Institute to revisit the concept of a compul-sory system.

"In the past we decided a compulsory savings system wouldn't change household savings behaviour. We've thought more about it and increasingly have come to the position that something must be done to help New Zealanders save more aggres-sively," Sundakov says.

New Zealanders soundly rejected a compulsory superannuation system in a 1997 referendum put forward by the then Treasurer, and head of New Zealand First party, Winston Peters.

However, Sundakov says in hindsight the Peters' scheme should probably have been adopted.

"Something like the Peters' scheme could work, with compulsory savings going to private accounts," Sundakov says.