Is pension WOP deducted from IP benefits?
Traditionally, many insurers ignored waiver of premium (WOP) benefit under a personal pension plan when it came to assessing the maximum benefit allowable under an income protection (IP) policy. This was mainly because the WOP benefit was an integral part of the pension plan.
The cost of the WOP was funded by unit cancellation and the benefit was paid in the form of units allocated to the pension fund. No actual payment was made to the insured, which would have made it more difficult to police as part of the financial assessment.
However, under the new tax regime for defined contribution pensions, which came into force on 6 April 2001, WOP contributions must sit outside of the pension arrangement. Those who already had WOP were able to continue with the benefit.
However, anyone seeking WOP post-April 2001 has had to take out a separate policy in order to protect their payments. This means that WOP contributions no longer attracted tax relief, although the resulting benefit is paid free of tax. Consequently, the WOP benefit only needs to be an amount equal to the net pension contribution.
Where the pension WOP is now provided via a standalone policy, some insurers still ignore this benefit for the purposes of the benefit limitation calculation, effectively seeking to retain the historical approach.
Other insurers may or may not deduct a pension's WOP depending on how it is provided, for example, integral or via a separate policy ' you should seek clarity from the respective insurers.
Where WOP is provided under a standalone policy it may be possible to select a benefit in excess of the pension premium. If this is the case the insurer is likely to treat the excess benefit as 'other insurance' for the purposes of the financial assessment.
Nick Homer
