Tax incentives brought a worthwhile return: Ten years after savings schemes were launched ahead of a Budget that ended assurance premium relief, Nic Cicutti looks at their impact on investors

THE REVELATION 10 years ago that the Government was considering ending tax relief on life insurance policies in its March 1984 Budget sparked a scramble to set up savings schemes. For once, the predictions were right. The Chancellor, Nigel Lawson, announced the end of assurance premium relief on 17 March.

The month before, more than 360,000 people raced to start savings plans with life companies. They were won over by the argument that the 15 per cent tax relief on their investments, half the 30 per cent basic rate at the time, would boost their value further.

This meant that a pounds 30 gross investment each month would cost only pounds 25.50. From April 1989, when tax rates were cut to 25 per cent, it would rise to pounds 26.25.

According to Mintel, the market research agency, about 90 per cent of the policies set up in those heady weeks were 10-year savings plans.

These tended to be either unit- linked maximum investment plans, where the schemes had direct exposure to the stock market; or with- profits policies, a more cautious investment in which annual bonuses are added together with a final sum at maturity.

Many such schemes have a high lapse rate as savers discover other priorities for their cash half-way through the investment period. But the tax relief advantages were such that at least half of the policies bought 10 years ago are thought to have been continued to maturity.

If so, assuming typical monthly savings of between pounds 30 and pounds 40, more than pounds 1.5bn in maturity payouts are expected soon.

Planned Savings, a monthly financial magazine, analyses the with-profits performance of every insurance company in its forthcoming April issue. Exact rankings for all life companies offices cannot be given because some have declared the final bonus on their 10-year policies while others have not.

Bonuses on 10-year with-profits endowments are expected to fall this year. Some companies that have not yet declared will pay on the basis of last year's figures. Even so, the wide disparities between the best and worst-performing companies are easy to spot.

Generally, where bonuses have already been declared, investors who signed up with Tunbridge Wells Equitable Friendly Society did best. Someone investing pounds 25.50 and then pounds 26.25 net - equivalent to pounds 30 gross - would get pounds 6,937 today.

The worst-performing insurance company was Guardian Royal Exchange, which last week renamed itself Guardian. The same investment would be worth just pounds 4,815.

Figures from Micropal, the statistics research company, show pounds 30 gross invested in the FT-SE 100 share index would have delivered pounds 6,395.

An investment in an average UK equity unit trust would have netted pounds 6,957, a high-interest building society account a return of pounds 5,050.

Beale Dobie, which sells second- hand endowment policies, has produced a simple guide to working out that growth. The guide slightly understates the annual return achieved because it does not take account of the change in tax relief rates from 15 to 12.5 per cent in April 1989. But the margin of error is small and has the merit of understating returns slightly.

For example, it shows the net investment with Tunbridge Wells has grown at an annual rate of 15 per cent while the same net investment with GRE increased by just 8.9 per cent a year.

Comparisons with building society rates or other investments must be tempered by the fact that they did not benefit from the 15 per cent tax concession.

Using the Beale Dobie tables, a pounds 30 monthly investment in a high- interest building society account would have delivered 6.9 per cent annually after tax, the UK equity unit trust 12.9 per cent and the then FT-SE 100 11.1 per cent. During that time, the average annual rate of inflation was 4.6 per cent.

Many savers will be glad their decision to invest in with-profits or unit-linked policies produced superior returns. But they should remember that these would have been much less striking without favourable tax treatment.

On a gross premium basis, for instance, Tunbridge Wells would have delivered a good, but not brilliant 12.6 annual growth rate. At 5.7 per cent, GRE's growth rate would have moved from barely respectable to positively pathetic.

Beale Dobie - 0621 85113; Planned Savings subscriptions department - 081- 868 4499.

(Photograph omitted)