With the introduction of personal pensions in 1988 came the ability to include waiver of premium be...
With the introduction of personal pensions in 1988 came the ability to include waiver of premium benefit in policies to provide assurance for clients that, in the event of long-term sickness or disability, their future contributions would be funded by the insurer.
O'Hallaran & Co has always encouraged its clients to incorporate waiver benefit unless their occupation or health precluded the availability of the cover. As the contribution designated for the waiver is relatively small, underwriting by the insurer has always been relatively strict and, in particular, difficult for manual occupations.
During the 1990s, there was a court case in which a client successfully sued an adviser for the loss of the pension entitlement when he had to stop work as a result of ill health. It was found the IFA had not advised him about the possibility of including waiver within his policy. Following this case, intermediaries were encouraged to at least discuss waiver benefit with all personal pension clients. This was supported by the Personal Investment Authority at the time.
The adjustment to pension rules introduced in 2001 by the DWP and the Inland Revenue when stakeholder pensions were introduced amended the criteria for waiver benefit. For new policies, tax relief is no longer allowed on the contribution relative to the waiver entitlement. This means a separate policy has to be issued by the insurer.
Some insurers also want a separate application form so their systems can cope. This results in extra work and time for both the client and the adviser for what can be a very small premium, perhaps £3 a month.
The result of this, perhaps unsurprisingly, is that some insurers have decided it no longer makes economic sense to offer waiver benefit. The pension policy itself may be competitive but the waiver facility is not available.
The new rules are, therefore, detrimental to client protection. The question is whether the parties making the rules actually thought through what they were doing. Surely, the cost of the extra tax relief the Inland Revenue would provide on the waiver benefit ' in most cases, no more than 5% of the total amount of a regular contribution ' is a pittance in the scheme of things.
These rules certainly do not assist pensions simplification, or inspire confidence in the facilities being offered.
There are also difficulties relating to pension term assurance caused by the same piece of legislation. Some insurers are no longer prepared to write pension term contracts because it is difficult to administer the rules. Prior to April 2001, up to 5% of an individual's net relevant earnings could be applied to pension term assurance cover if required. This was out of the total allowance based on age and earnings and it was up to each individual to decide whether they wanted to spend their contributions on pensions or pension term.
As most people do not make use of their full allowance for pensions purposes, it was not normally an issue, except for older clients trying to maximise pension contributions coming up to retirement.
The criterion is now that the amount being spent on pensions term cannot exceed 10% of the total pension premium being paid. It is very difficult for an insurer to actually know whether the rules are being broken or not because a pension policyholder can very well have contracts with several insurers.
An insurer can only check on whether the 10% limit is being exceeded relevant to the contribution being paid to the one company.
Eleanor Downie, consultant at O'Hallaran & Co
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