Tony Mudd: Why Aviva’s controversial new product raises the protection bar

Tony Mudd

The recent launch of Aviva’s relevant life policy has not escaped the attention of the protection community. While yet another entrance into this market would most likely have gone without fanfare, the difference with this new product is the inclusion of critical illness benefit: a benefit, which, based on common interpretation of legislation, had up until that point not been considered possible.

The advantages of relevant life policies are well known:

  • Any benefit will not form part of the employee’s pension lifetime allowance
  • Subject to satisfying the “wholly and exclusively” test contributions paid by the employer will be treated as a business expense
  • Contributions paid by the employer will not be treated as a benefit in kind on the member
  • Contributions paid will not form part of the employee’s annual allowance, increasingly important from April 2016
  • Any benefit payments are not only free of income tax but on death will be paid through discretionary trust, which, while subject to the relevant property regime, will not fall part of the members estate for inheritance tax purposes.

Provided we are dealing with an individual who is an employee and who is not looking for benefits to be provided beyond the age of 75, or outside of their period of employment, relevant life policies have clear and significant attractions. The possibility, therefore, that critical illness cover can be provided should be of real interest.

There are two key provisions in the legislation relating to relevant life policies. The first is S393 ITEPA 2003 and the second is in S480-482 of ITTOIA 2005. Sub-section 393(B)(4) defines a relevant life policy as:

  • An accepted group life policy as defined in section 480 ITTOIA 2005, or
  • A policy of life assurance, the terms of which provide for the payment of benefits on the death of a single individual and with respect to which:
  • Condition A in section 415 of the Act will be met if paragraph (a) in that condition referred to the death in any circumstances or except in specified circumstances, of that individual, and if the condition did not include paragraph (b), and
  • Conditions C and D in that section and conditions A and C in section 482 of the Act are met, or
  • A policy of life assurance that would be within paragraph (a) or (b) but for the fact that it provides for a benefit which is an excluded benefit under or by virtue of paragraph (a) (b) or (d) of sub-section 3 (of ITEPA s 393B).

It is this final bullet point that is of particular importance and interest, as under S393B (4) (c) ITEPA 2003 other benefits apart from death benefit can be provided, including ill health, disablement or death by accident for an employee during service.

It is somewhat ironic it is this section existing relevant life providers rely upon to be able to include terminal illness benefit to their contract but have not thought (or previously interpreted) it to be able to extend the benefits under the contract to include critical illness cover.

In short, I suggest inclusion of critical illness fits clearly within S393B (4) (c) ITEPA 2003, such that any policy including this benefit would remain within the relevant life policy conditions. Assuming, of course, that all other conditions are met, and the additional condition in section 482 ITTOIA 2005 is also satisfied in relation to tax avoidance.

This product launch is an important development and one Aviva should be congratulated upon. While its competitors may currently take a different view, I suspect it will not be long before the addition of critical illness will appear in their own contracts.

Tony Mudd is divisional director of tax and technical support at St James’s Place