All existing life cover and waiver of premiums within personal pension products could cease on 6 Apr...
All existing life cover and waiver of premiums within personal pension products could cease on 6 April 2001, if the Government proceeds with its stakeholder proposals.
Contained within the Government's Consultation Brief Six, released in September, is the proposal that life cover and waiver of premium should not be included within the stakeholder product.
This is because the person buying the cover is essentially receiving an unintended tax relief on their contributions.
Waiver, along with life insurance, has typically been sold as part of a pension so that it can obtain some tax benefits. This has been limited to no more than 5% of earnings for life assurance and 25% of contributions for waiver of contribution benefits.
At the moment there are two main ways to incorporate rider benefits.
A pension scheme member can either buy cover on a level basis or single basis in which the premiums become more expensive the older the plan holder becomes. Typically rider benefits can add an additional 2.5% to the cost of the pension, although a group personal pension can add this below 1 1%.
Many envision that the Consultation Brief Six only applies to stakeholder but, because it has set out the structure of a new defined contribution scheme which includes personal pensions as well as stakeholder, then the proposal to abolish rider benefits would affect all existing personal pensions.
Steven Cameron, pensions development manager at Scottish Equitable, said: "This also means, even within existing personal pensions, it may no longer be possible to have life cover or waiver on premium. What do we tell people that as of 6 April 2001, when stakeholder is introduced, they are no longer covered? We do not actually believe that this is what the Government will follow through with. It is more likely that they will impose a cap on what level of benefits scheme members could buy. Within the paper they suggest a possible cap of £200pa."
The level of cover £200 per year would provide could be insufficient if someone enters a pension arrangement late in life. According to Scottish Equitable figures, £200 per year would give a 30-year-old, non-smoking male, life cover of £259,200.
However, it would give a 50-year-old £45,350 worth of cover and a 60-year-old male would only receive £14,280 in cover. The group has recommended to the Government that it extend the cap to 25% of the maximum contributions allowed.
Cameron said: "We are proposing that they shouldn't scrap it and if they insist on having a cap on contributions, it should be made a reasonable one, which should be at least £900 per year for everyone."
In the past there have been professional indemnity issues where lack of waiver in a product has hurt IFAs. It is considered best advice to recommend a product that has this option.
The Government has argued that the break with earnings for contributions to pensions will also allow scheme members to still contribute their earnings related contributions for up to five years past the date the employment ceased. This would allow someone, who has lost their work either through an accident or job loss, to continue to contribute to their pension. This would offer members some protection similar to waiver of contribution.
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