Gordon Brown's Pre-Budget report on cutting off PTA tax relief has forced many insurers to drop the product
By Johanna Gornitzki
In recent weeks, words such as "shocking", "shameful", and "unbelievable" have all been used when mentioning the latest development in the pension term assurance (PTA) arena.
It all kicked off on 6 December when the Pre-Budget Report revealed that the Government is considering removing tax relief on PTA policies when the Budget comes out in April this year.
The report stated: "The Government has become aware that, as a result of the flexibilities that the new pensions tax regime has brought in, life insurance policies that provide lump sum death benefits alone are being offered as personal pension arrangements eligible for pensions tax relief. This undermines the principles set out above. The Government will therefore work with the pensions industry to explore how the principles can be applied to PTA contracts."
Reaction
The news caused uproar in the industry, with providers pulling out of the market as quickly as possible. Standard Life was the first one to go, shortly followed by Norwich Union, Legal & General, Friends Provident, and Aegon Scottish Equitable. Not long after Royal Liver, Bright Grey, Liverpool Victoria, Scottish Widows and Bupa announced they had temporarily withdrawn their PTA offerings. Moreover, Zurich decided to put its plans to launch its PTA product into the IFA market on hold until further notice. It has also withdrawn its PTA available through OpenWork.
Major adviser firms, including LifeSearch, Hargreaves Lansdown, Direct Life & Pension Services and Torquil Clark Life Insurance, also reacted to the news by removing PTA from quote engines and not accepting any new applications.
So what is the deal? Who will be affected by this? And what will happen to policyholders who already have PTA policies in place?
While the Pre-Budget Report announcement does not give much away, leading industry experts agree that it will not affect customers who have taken out PTA on or before 5 December 2006.The main problem here lies with policies still in the pipeline, which are estimated to be up to tens of thousands. While Her Majesty's Revenue & Customs (HMRC) has been quite clear on what may happen to policies sold now, the guidelines regarding pipeline cases have been somewhat blurry with HMRC advising that it is a matter for each individual provider to determine how this applies to their pending cases. This vague instruction has led many insurers to take a different stance on how they will deal with pipeline cases - something that has been heavily criticised by advisers.
Royal Liver, Legal & General and Norwich Union have announced that they will not place pipeline PTA applications on risk but will offer temporary cover for a set time until the ordinary life cover is written in replacement. Friends Provident and Aegon Scottish Equitable have decided to continue to place any post 5 December pipeline policies on risk until April 2007 when they will exercise a switch option in the event that the Government carries out its proposals. Scottish Provident is offering a similar option and will continue to underwrite pipeline cases, but will allow policyholders to switch to an ordinary term assurance without any further underwriting if the tax relief is abolished. Liverpool Victoria has followed a similar line, but policyholders who will have to convert to a regular life policy will do so at the terms prevailing at that time. Bupa, in the meantime, has opted to place policies if they are dated prior to 6 December but asks customers to sign a declaration form saying they will pay back the tax relief if Bupa has to transfer them to traditional term assurance. Policies placed after that date will be returned without any temporary cover.
Lutine has taken a slightly different view and has informed all its brokers to say that it will back date all pipeline policies to before 6 December. This offer ended on the 15 December, however, and all policyholders who have not been accepted after that will have to sign a disclaimer saying they will repay any tax relief. Standard Life and Zurich have not yet decided on their stance. However, the latter has announced that it intends to start issuing pipeline cases shortly and it will offer PTA customers to switch without further medical evidence to an ordinary life plan. This data was all correct by the time COVER went to press. However, it is likely some insurers' stance may have changed.
Existing policies could also be hit by the changes despite assurance that policies on risk before 6 December will remain unaffected. Industry experts have confirmed that if policyholders increase the sum assured or extend the term, the life policy would no longer qualify for tax relief after the Budget. This could affect as many as 100,000 - the number of people estimated to have bought PTA since A-Day.
So who will have to pay for this? While consumers stand to lose out on tax relief, the greatest losers in the PTA drama will be advisers, providers and the industry as a whole. Providers - as they have spent an enormous amount of time and revenue to promote their new offerings and will have to continue to so as not to cause a mis-selling scandal by not updating their clients and literature (one provider has estimated that it will cost it around £200,000 for it to do so). IFAs - as they have to try to get their heads around all the changes while at the same time reassuring their clients. Worst of all, however, is the fact that this will have detrimental effects on the industry, not only sowing confusion for customers but creating distrust in the sector overall, making the industry look incompetent.
Recovery
The sad thing is that instead of focusing on bridging the £2.3trn protection gap, the protection industry will now have to spend a considerable amount of effort to recover from the hangover of the PTA party that, in the end, only lasted eight months. All this trouble simply because the Government is not able to decide whether it is in or out.
As COVER went to press, the Association of British Insurers and other organisations were in talks with the HMRC so more light could be shed on the situation with pipeline cases in the near future. Latest speculation is that pipeline policies could be treated as existing business.
Looking at PTA overall, there are suggestions the Government may decide to keep tax relief but link it with pensions. This would turn the focus back on the debate of whether PTA should be sold by pension experts, seeing the industry back at square one - again.
