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Mixed messages

Scottish Widows marketing director for protection Nick Kirwan says the industry has been delivered a heavy blow over pension term assurance and with nobody knowing what is round the corner, the wrong messages are being sent out to customers.

Chancellor Gordon Brown has delivered a major shock for the protection industry. Eight months after providers were given the go-ahead to sell PTA as part of wider financial planning and not just linked to pensions, the Treasury have said it is going to do a U-turn, which has caused a mass exodus from the market.

What is really amazing about this is that the FSA consulted closely with the industry prior to the A-Day changes and worked on coming up with the opportunity to allow PTA to be used for more than just pension planning. This is important because the FSA reports to the Treasury.

This, of course, meant that advisers not regulated to sell pensions would be selling PTA – which can leave little doubt that PTA was going to be used for more than just pension planning. What’s more, the rules allow PTA to be written on a decreasing basis for the purpose of linking it to the mortgage.

They also agreed that the name could be changed to something more easily understood, seeing as it did not need to be linked to the pension – such as life cover with tax relief.

The first problem the industry faced on December 6 when the pre-Budget report was given was interpreting exactly what it meant. The announcement was buried deep in the small print and not particularly clear around exactly what was intended. However, after a lot of digging, it soon became clearer that our worst fears were coming true and that there was going to be a review over the future of tax relief on premiums for PTA.

Furthermore, any change that might be made would be effective from December 6, so there was a very real possibility that the tax relief on life cover premiums was going to be removed and that it would affect all policies being sold from that day onward. Such a move is going to have a huge impact on the whole industry. First, for consumers. We already know there is a huge protection gap in the UK and PTA was going some way to helping close the life cover gap by making the product more appealing to the price-conscious. The removal of tax relief on premiums could send out the wrong message, One that says protection is not important when planning your finances.

Intermediaries will now have to work out what is going to happen to their customers who have PTA cases in the pipeline. The little information we have is that cases “entered into” before December 6 will not be affected. However, we do not know what “entered into” means. Is it that the policy has been issued, put on risk or simply that it was applied for?

Until we get answers to this, Aifa has sensibly suggested that you let your customers know that there is a possibility that the tax relief can be removed so that they can plan for this scenario. If this does arise, then I am sure insurers will be as flexible as they can to ensure that your customer remains covered – perhaps by making a switch to conventional life cover as straightforward as possible.

Intermediaries and insurers should work together to ensure that there is no delay processing the policies that have already been submitted as we do not want people to be left without cover, as nobody knows what is around the corner.

And what about those customers that intermediaries have already put PTA in place for? We understand that for cases issued before December 6, tax relief on premiums will remain. However, I would like confirmation from the Treasury that the tax-free status of the benefit will not change as well.

The impact on insurers is also not negligible. They need to agree their pipeline arrangements and decide what to do with policies that might not have met the definition of “entered into”. But probably the biggest impact on insurers will be the time and money that they have invested in developing their PTA offering – which will run well into millions – for a maximum of eight months of trading. There is no way that they will have been able to recoup their costs in this time so there is likely to be a big whole in a lot of balance sheets.

So where to next for PTA? Well, we already know that the majority of insurers have pulled out of the market, however, this is not the end of the story as there is still the opportunity to feed into and help shape the Treasury’s review. The outcome of the review could, of course, be a straightforward withdrawal for all policies unless they are linked to an occupational pension scheme (as the Treasury have hinted it be) or it might not go this far.

It could be that PTA goes back to only being sold alongside a pension, which would allow people with a personal pension scheme to continue to benefit from it. Of course, this would then raise the question of whether Icob advisers would still be allowed to sell it or would this require another regulation change?

Another option is to restrict the level of premiums that can be paid into PTA or restrict the sum assured. This would be a familiar route as tax relief on premiums has had various limits since it was first introduced back in 1970. We might even see them taking an Isa-type approach where a premium/sum assured limit is put in place and then reviewed annually.

Another possible option would be to make the sum assured, or part of it, payable as an income to fund a dependent’s pension to allow the benefit to be viewed as income replacement.

It is going to be an interesting time over the coming months as we all work with the Treasury to shape the outcome of the review so that it benefits the customer. But probably the biggest thing that we need to focus on is that the need for protection is greater today than it has ever been. Just consider the recent research from Macmillan which highlighted that one in 17 people diagnosed with cancer lose their home. So no matter what the future holds for tax relief on premiums we should still be ensuring as many people as possible are financially protected.

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