The birth of the ISA: The need for assurance

One of the great surprises with Individual Savings Accounts (ISAs) is to find that only a small number of managers of the new tax- efficient savings plans are prepared to offer life assurance. In fact, some of the biggest life offices have already stated that they will not be offering any life policies even with their Maxi-ISAs.

Under the ISA rules, up to pounds 1,000 a year per person can be invested in life assurance, with neither income nor capital gains tax payable on the underlying fund or the policy proceeds. In addition, a 10 per cent tax credit is claimed by the fund on the dividends of UK shares held in respect of ISA policies and paid before the end of the tax year in 2004.

Colin Ledlie of Standard Life, for example, claims: "Customer research carried out by us showed conclusively that there was little demand for life assurance. In fact, it showed that while there was a lot of confusion about ISAs in general, people saw them as investment and savings products, not for protection." Other big life offices and investment houses (including Scottish Widows, CGU, Equitable Life, Legal & General, and Royal & SunAlliance) have followed this line and have already announced that their ISAs will not offer any life assurance element.

So far, only a handful will be offering this element. They are likely to be joined by some of the friendly societies when they announce their plans. Tumbridge Wells Equitables is likely to offer a with-profits bond investment while Liverpool & Victoria is expected to announce its ISA range in June and its insurance element is likely to be an endowment policy with premiums starting at pounds 30 a month, just above the maximum limit for friendly society tax-exempt savings plans.

"We wanted to offer our investors the full ISA range" says Gug Kyriacou of Abbey National. "We know that many of them do not want to invest in equities, preferring the idea of with-profits policies that smooth out the peaks and troughs of the market. We've had over 20,000 requests for the video we offer our investors that explains our ISAs, so we know that there is plenty of demand out there."

At present, most of the providers offering life assurance ISAs are taking a similar path to Abbey National and offering a variant of the with-profits bond. "It is very difficult to provide a version of the conventional with- profits endowment policy," says David Mott of the Co-Operative Insurance Society. "The with-profits bond, however, is designed to be a halfway house between a building society account and equities. The initial bonus rate will be 4 per cent, better than most deposit accounts, and includes a special 0.5 per cent first-anniversary bonus on cash contributions paid before 6 April 2000. We believe this bond is suitable for those savers who like the relatively low risk of with-profits plans."

Norwich Union, however, found from its research that people did want a type of with-profits endowment that could be included in an ISA. "We found that many savers were fed up with the returns they were receiving from notice and deposit accounts but were unhappy about investing directly in equities," says the company's Martin Chapman. "Insurance ISAs bridge this gap for those averse to risk."

More to the point, Norwich Union perceives that many potential investors could use its insurance ISA to pay their mortgages. "Even today, some 80 per cent of borrowers use some sort of savings plan to repay the capital on their mortgages," adds Mr Chapman. "PEP mortgages never really took off as they were seen as highly volatile and risky. We have developed our life assurance ISA as a mortgage repayment vehicle for those who take out interest-only home loans. We estimate that the pounds 83-a-month maximum premium per individual is enough to pay off a pounds 52,000 mortgage over 25 years - pounds 100,000 for a couple."

The Government may have stated that ISAs are only guaranteed to be around for 10 years, but as Mr Chapman points out, there was never any guarantee about how long PEPs would be around and this did not stop providers offering PEP mortgage repayment plans.

"The insurance ISA is designed for long-term savers, not those who want quick access to their money," says Peter Beauken of Pearl Assurance. He is surprised that so many providers have opted not to include life assurance in their ISAs. "It's hard to work out what's behind spin. I suspect the real truth is that many companies have IT problems. It took a long time for the Government to announce its ISA details, too long for them to put the right systems into place for them to have an insurance ISA at the start."

Whether through endowment or bond, all the providers will be offering unitised with-profits. This means that it will be easier for the investor to keep an eye on the value of their insurance ISA. But none of them will have CAT marks, because the providers found that they could not offer a minimum premium of pounds 25 a month or pounds 250 a year with a maximum charge of 3 per cent, nor can they offer surrender values at least equal to a full return of premiums after three years.

MAIN INSURANCE ISA PROVIDERS

Name Type of policy Minimum premium Charges

Abbey National W profit bond pounds 25 per month 5% initial,

(tel: 0800 302030) 1.25% annual

Co-Operative Ins W profit bond pounds 25 per month Taken into

(tel: 0161 832 8686) setting bonus rates or pounds 250 account before

Norwich Union W profit endowment pounds 25 a month pounds 2 a month

(tel: 0800 0562450) initial, 0.875% annual policy fee, 5%

Pearl W profit endowment pounds 30 a month 3.3% annual

(tel: 01733 470470)

Scottish Amicable W profit bond account pounds 50 a month 5% initial, bonus

(0141 248 2323) of annual charge rate take

Scottish Friendly W profit bond pounds 30 a month 4% initial,

(tel: 0141 275 5000) or pounds 500 1% annual