By Rachel Williams The Government's planned removal of tax relief from pension waiver of premium ins...
By Rachel Williams
The Government's planned removal of tax relief from pension waiver of premium insurance has boosted product opportunities for income protection insurers, according to market experts.
Under the Government's proposals for the tax regime for defined contribution pension schemes, including stakeholder, waiver of premium benefit may still be received, but tax relief will be passed on from the contribution to the benefit used to pay pension contributions.
As a result, the Government will no longer need to control where contributions to the fund come from. It is also proposing that, on incapacity, individuals will be able to maintain their pension contribution of £3,600 a year, but individuals wishing to pay more will only be able to do so for a further five years.
Ron Wheatcroft, technical manager at Swiss Re, said that this move opens up the market for income protection providers as non-earned income will be pensionable. Before stakeholder, individuals were only able to put earned income into their pension, leaving people on income protection claims unable to maintain pension contributions.
He said: "Income protection providers will now have the opportunity to develop policies that incorporate pension waiver insurance within an income protection policy. This move has increased flexibility and is consistent with the Government's aim to broaden pension provision to people without an earned income."
Andrew Smith, PR manager at UNUM, said that income protection could form a more cost-effective method of maintaining pension contributions as it is traditionally less costly than waiver of premium insurance. Waiver of premium will become more expensive once tax relief on the premium is removed.
He said: "We could look to develop products that cover 50% of salary with an additional benefit to cover pension contributions under stakeholder for five years after earnings ceased. After this period the claimant would continue to receive their pension contribution which could be invested in alternative investment vehicles such as an ISA. Alternatively, the pension benefit could be limited to five years."
Wheatcroft added that there was also scope for innovation on unemployment cover.
"Instead of just looking at products that maintain the pension during incapacity we can look at products that protect the pension fund through periods of unemployment. The last thing the Government needs is for people to stop making pension contributions."
Tax relief on pension term has been kept in place, but contribution levels have been altered in favour of pension savers.
Until April 2001, pension term contributions will remain at 5% of net relevant earnings, after which it will transfer to 10% of total contributions. As a result, those making smaller contributions into their pension fund will not be eligible to pay as much into their pension term policy.
Wheatcroft added that a decline in pension term sales could be expected and replaced with an increase in term assurance written in the life fund to avoid complications when policyholders' situations change.
