Few in the intermediary community can have failed to notice the flurry of activity around pension term assurance (PTA) as a result of the 2006 pre-Budget report pointing to PTA as ‘undermining’ pension legislation.
The crux of the matter is the Treasury is unhappy that PTA is being offered as a stand-alone product and not as part of a pension planning overview.
In its view, PTA is a single life term assurance policy with tax relief on the premiums, particularly attractive to those who are not active members of an occupational pension scheme with death benefits.
The Treasury’s case is perhaps clearer if the product’s history is taken into account. The Income and Corporation Taxes Act 1970 allowed the self-employed individuals to buy PTA. The maximum premium allowed was 5% of net relevant earnings and premiums counted towards the overall limit allowed on tax relief on any pension.
The 1988 reworking of the act saw the introduction of personal pensions, which allowed the employed the same tax relief for PTA. Then, in 2000, another reworking meant new PTA products written after 6 April 2001 had a maximum premium limited to 10% of the premiums being paid into the customer’s personal pension.
Up to this point the product was not particularly popular, with many providers not even offering it.
The floodgates opened on ‘A Day’ in April 2006, when in practice, almost everybody below the age of 75 became eligible to purchase PTA and get tax relief on the premiums, with or without a pension.
The sales catalyst was widening the authority to sell PTA from the Conduct of Business sales regime – applied to pensions and investment products – to include the Insurance Conduct of Business (ICOB) sales regime which applies to most term assurance and general insurance products.
This brought the product within the remit of many mortgage and protection specialists who were regulated under ICOB. Since then, it is estimated around 100,000 policies have been sold, with the Treasury finding many of these sales as not within its original purpose.
Peter Chadborn, principal at IFA CBK, was one of the first in the industry to identify in the media the product’s sales could increase significantly in a simplified pensions regime. He does not think the Government has a case.
He says: “If this was a genuine loophole closing then I would be more in sympathy with the Government, but there is no way the Treasury can claim ignorance that PTA was going to be sold in this way. The product was not being sold as originally envisaged, however there was ample opportunity to prevent that.”
CBK has now stopped selling PTA. The firm had also only sold the product to those who needed new cover and had only just begun to identify those higher rate tax payers that could be offered the product as part of re-broking.
But other firms have escaped the annoyance of having to contact clients through the nature of their client base. Hamptons International Mortgages, for example, has never sold PTA.
IFA firm Torquil Clarke, is taking a robust view on the subject, removing PTA from its quotation systems, refusing new applications and requoting all clients who have had a PTA quote recently with an ordinary term quote.
Jason King, director at Torquil Clark Life Insurance, says: “We were surprised the Treasury ever allowed PTA to be relaunched as it was, so it comes as no surprise that the Government has done another U-turn.”
He adds: “We have now wasted considerable time and money communicating the whole PTA story to clients. We will now have to expend further valuable resources communicating the U-turn and its implications to consumers. The Government has made a complete mess and left us to clear it up.”
Paul Williams, compliance director at Hamptons, says: “We predominantly deal with high-net worth clients and we were conscious that the caps on their pension pots may suffer, currently at a max of £1.5m. We had concerns the Government may put a stop to the sale of PTA.”
Jonathan Burridge, managing director at brokers Quantum Mortgages, takes a more conciliatory view. He observes that these U-turns highlight the Government’s consultation process is failing, but adds: “It must surely be better that a policy is withdrawn if it is evident it is not going to succeed rather than wait until it causes greater damage for the sake of face.”
However valid opinions on the Government decision are, there remains a more practical problem of what to do now. At the time of writing, many insurers had withdrawn from the PTA market, including Legal & General, Standard Life and Royal Liver. Norwich Union is offering pipeline customers three months’ free cover, acknowledging ‘uncertainty’ in the market.
The Association of Mortgage Intermediaries (AMI) has already contacted advisers. It suggests that all business after 6 December is subject to a change in tax rules, and this should now be included as part of the advice process. Clients not yet on risk should be informed in writing. AMI adds “members may wish to reconsider recommendations”.
Worringly, some advisers are not so sure about present holders being immune. King says: “We do not know at this stage whether tax relief will be withdrawn altogether, capped at the basic rate, or if it will affect policies that also have a pension savings element. We cannot rely on this statement, we cannot be certain that existing policyholders will not be affected.”
Ultimately, this is yet another waiting game for the industry that not only breeds doubt in the Government’s understanding of the market but clients’ trust in the advisers they have gone to for help with their finances.