Tax Efficient Life insurance- commonly known as Pension Term Assurance (PTA) has been thrown into chaos by an unexpected one liner in Gordon Brown’s Pre-Budget Report. This suggests that the tax relief will be withdrawn, not just from 1st April 2007, but may even be backdated to December 2006.
Insurers and advisors are in total confusion. Some are very angry at the thoughtlessness and comedic chaos caused by the Treasury. Emma Walker of MoneySupermarket says, “Although only available since April, nearly one in ten life insurance customers already have a Pensions Term Assurance product, many having quite reasonably switched over from ordinary life insurance to save themselves money. A single, vague paragraph straight out of the blue throws their situation into chaos. It’s clear the tax relief is already costing the Treasury too much, hence this thinly veiled crackdown. We have been speaking to life insurance providers to clarify their positions, but most are still reeling from the news and haven’t yet decided what action they will take. PTA customers face a still more confusing situation, with some but not all providers already offering a limited option to switch into ordinary life cover, but so far not for this circumstance of course. The Government has said any changes will not affect those who have already got a PTA policy, but they do not state openly whether this means they will continue to receive tax relief for the term of their policy or whether they will simply not face clawback of their tax relief they have already received. And what about those who have already applied in good faith but whose policies have not yet been approved?”
The news has caused uproar in the industry. Insurers over the next few days will have to decide if they need to withdraw the product from immediate sale or choose to continue to allow customers to purchase it but with a caveat that tax relief could end next year.
A PTA effectively gave income tax relief on life insurance premiums at a person’s highest marginal rate. For most people this was 22%, but for higher rate taxpayers it was as high as 40%.
Most advisers are saying that they will hold off from recommending this product until all is clear. It is far from clear as to whether or not tax relief will apply after 6 December. The original aim was to encourage more people to buy life insurance. This seems to have been ignored by a Treasury grasping at any income available.
Louise Colley, Head of Protection, Norwich Union says, "This change in direction sows confusion for customers and creates distrust in the industry overall. Pension Term Assurance (PTA) has been on the agenda for a long time now and making changes only 8 months after the product was launched has achieved the worst possible outcome for everyone. The industry may now have to bear the cost of developing and administering the product which now has a very limited, and customers and advisers no longer know which way to turn."
The Treasury will consult on how best to abolish the tax relief but it looks sure to go after the next full Budget in April. After that it seems PTA will not be available. If you have PTA already, the Government will not pursue you for the unpaid tax, but it is so far unclear if existing polices will be allowed to continue or if they will need to be replaced by traditional life cover.
Vanessa Owen, Head of Technical Services at Liverpool Victoria, says: “We regret that in the Pre-Budget Report the Treasury has indicated that stand-alone Pensions Term Assurance policies will effectively no longer be permitted. We believe the availability of tax relief on Life Protection has encouraged more people to provide for their dependants. The availability of tax relief offered a real opportunity to close the well publicised protection gap, a key component to alleviating dependency on the state.”
Standard Life says, "The Chancellor’s announcement regarding standalone PTA could lead to fewer individuals protecting themselves against paying inheritance tax. This is because if they now purchase a traditional life assurance policy they are less likely to put it in trust, where as PTA is subject to a master trust which means the proceeds are generally not subject to IHT"
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