Charges for unit linked funds

[1495_sc]

Hi,

Can someone confirm how these charges are made practically? There is a charge in BLAGAB fund for tax on realized and unrealized gains, investment income and mark to market movement in gilts and bonds.

Is this charge allowed for by reducing the value of in force units as and when profit is made? This would imply that the fund value of policyholders is reduced to the extent that tax is incurred by insurer.

How are these charges made at the time of pricing? Increasing value of unit price such that lower units are allocated to policyholders?

Thank you

 

[Lindsay Smitherman]

The unit price wouldn't be increased in respect of tax, it would be reduced. This ensure that the p/hs who incur the tax charges are the ones who have benefitted from the investment returns that generated that tax. (If the unit is increased then the existing p/hs who should be liable for the tax charge will get higher benefits and therefore would have gained from, rather than contributed towards the tax due - which wouldn't be fair. And new p/hs coming in would suffer from the higher unit prices, but they haven't received any benefit from the investment returns that generated the tax due - so why should they have to pay for the tax on it?)

When the tax due is paid to the tax authorities, the appropriate amount of money is taken out of the unit fund and the unit price would automatically fall accordingly. If a liability to future tax is incurred (eg on unrealised equity gains), then a deferred / accrued tax liability would be set up within the unit fund (this would then be released when the tax is actually payable on realisation), similarly reducing the unit price.

[Recall from SP2 the unit price deduction in relation to accrued tax. The idea of holding a deferred tax liability within unit pricing is also covered on pages 11 and 12 of Chapter 7 of the SA2 Core Reading.]