Sales of pension term assurance have soared since A-Day but confusion surrounding the levels of advice associated with this hybrid product are still worrying many advisers.
Now being sold as a cheaper alternative to term insurance, PTA is written under pension rules. Until April this year, it could only be sold by advisers regulated under the FSA’s code of business regulations.
However, changes to the Cob rules introduced at the same time as pension simplification allow PTA to be sold by general insurance and protection advisers – those who conduct their business under Icob rules.
Until April, only one provider, Royal Liver, offered PTA but nine other providers have since launched products including Bright Grey, Bupa, Friends Provident, Legal & General, Liverpool Victoria, Norwich Union, Scottish Provident, Scottish Equitable and Standard Life. Other providers such as Axa and Scottish Widows are expected to introduce products and it is estimated that nearly 60 per cent of advisers are selling PTA instead of term insurance.
The reason why PTA is a cheaper form of insurance is because its premiums can be written under pension rules and therefore clients get tax relief on the premiums they pay. This means clients get more insurance for their money. For every 78p in premium a client pays, the PTA provider can claim 22p in tax relief. Higher-rate taxpayers have to claim back the extra through their tax return.
While the suitability of product itself is not under question – for example, Lifesearch head of protection strategy Kevin Carr believes that PTA is a viable alternative to term insurance for 97 per cent of clients – questions are being raised over the level of advice that needs to given with it, since it is a product covered by pension regulation.
AWD Chase de Vere research manager Julie Smith says there is still too much confusion and this could lead to cases of misselling.
She says this is because Icob advisers are not regulated to give advice on pensions and their advice remains restricted solely to pension term contracts that satisfy the definition of pure protection contracts.
“This means that they are unable to advise on a policy that runs past age 70 and has a term of more than 10 years although this may change if, as anticipated, the age 70 rule is abolished,” says Smith.
Icob advisers need to have procedures in place to gather sufficient pension information from the client to determine if PTA is suitable.
The real issue of suitability hinges on the lifetime limit introduced as part of pension simplification. If a client’s pension fund, combined with the sum assured on their PTA policy, breaches the £1.5m ceiling, the client will incur a 40 per cent tax charge. A client who applies for enhanced protection and continues to pay a PTA premium will also negate that agreement.
Smith says for most clients the chances of breaching that limit are very small and that selling PTA as an alternative to term insurance is fine but the adviser has to be very careful. She believes that as long as it can be shown that the necessary research has been undertaken to prove the client’s level of existing pension arrangement is safely under the lifetime limit, an Icob adviser will not have to provide any warning to the client of potential unsuitability or highlight the fact that they are not regulated to give pension advice.
She says: “The main concern would be if an Icob adviser did not ask the client the right questions about their pension arrangements and did not emphasise the fact they could not give advice in this area, as this could lead to potential misselling claims if, further down the line, the client faced over-funding tax charges.”
She says this highlights the importance of choosing a product that enables you to switch from a tax-efficient pension term contract to ordinary term insurance if your circumstances change.
“But it has to be under buyer beware as not all providers allow you switch in this way and there are several variations with those that do. Progress from Royal Liver and Standard Life are two examples of providers which allow such a switch if circumstances change, with the added advantage that new premiums will be same as before but without the tax relief,” says Smith.
Last week, Bright Grey, the protection specialist arm of Royal London group, said it too would be offering such a conversion option for its PTA plan. All Bright Grey PTA planholders who hit 90 per cent of the pension lifetime limit will be able to switch to Bright Grey’s traditional life cover with no additional underwriting being necessary.
Bright Grey distribution director Andy Peters says the option is being included retrospectively, so all planholders will have the facility.
He says its inclusion is a direct response to increasing demand from advisers.
“We have seen a lot of interest in Bright Grey’s PTA plan and are really pleased to be adding in the conversion option,” says Peters.
There are other circumstances that advisers need to check when selling PTA to a client. Smith says if a client is a lower-rate taxpayer and only paying a small monthly life insurance premium, PTA would not make sense.
Other things to watch out for when switching include the client’s health and future plans. If someone’s health has deteriorated, premiums for a new PTA policy are more expensive. Advisers also have consider whether a client who has accelerated critical-illness benefit in their life cover should be swapping. If they swap, critical illness will have to be set up as a stand-alone plan as it cannot be held within the tax-efficient wrapper.
Other reasons for not taking out PTA include a change of career, moving abroad or potential unemployment as these may impact on the client’s tax position. Life cover add-ons such as critical illness, waiver of premium, terminal illness, guaranteed insurability, indexation or conversion options could also be lost when swapping.
By far the biggest potential for misselling comes from the Government itself. There have been fears that it could clamp down on the tax-free benefits offered through PTA.
Royal Liver IFA marketing manager Andy says the recent White Paper on pensions mentioned nothing about PTA but that does not mean it is safe. He says: “The fact it was not mentioned means more advisers may feel more comfortable selling it.”
Smith says advisers should ensure they put the client in a plan that allows them to switch. The adviser needs to check whether new underwriting be required and remember that consumers could be forced to pay the gross premium, which could be around 20 per cent higher.
She points out that some providers offer a switch should there be a change in legislation whereas others offer a switch if the client’s circumstances change or they approach the lifetime limit.
For the meantime, PTA remains a useful weapon in the adviser’s armoury .
Friends Provident head of protection marketing Ian Jefferies says most PTA products have level and decreasing sum assured options and have been designed in the post-treating customers fairly climate.
He adds that clients who are likely to breach their lifetime limit are likely to have a Cob adviser on hand.
Smith says: “If a client decides to go down the PTA route and already has insurance in place, it is essential not to cancel any existing arrangement until they are sure the new PTA policy is accepted and in place, as this could leave them uninsured.”