As the launch date for stakeholder pensions fast approaches, product providers and IFAs are consider...
As the launch date for stakeholder pensions fast approaches, product providers and IFAs are considering the scope to add risk benefits alongside the new integrated tax regime for stakeholder and personal pensions.
With this in mind, we conducted a survey among our panel of leading IFAs to determine their attitude toward the provision of risk benefits from April onwards and their awareness of the new opportunities this can bring. We focused the study on benefits designed to maintain contributions in force and, therefore, to achieve maximum contributions to the pension fund. The provision of life assurance cover within the tax-favoured pensions' regime was outside the survey scope.
The survey indicated that most IFAs advise and complete a very high proportion of waiver cover on personal pensions products. According to regulation, it is incumbent upon advisers to draw potential policyholders' attention to the need for this benefit, and many providers report a significant take up rate across their personal pensions products.
From April 2001, there will be a number of important changes to the rules governing the provision of risk benefits within personal pensions. These will no longer be integrated within the basic pension products, but will need to be written under a separate contract that can be used to fund the pension contribution upon the occurrence of the insured event. This means tax relief will no longer be available on the waiver contribution, but the good news is that the product will only have to cover the net contribution, with tax relief added on the basis of a monthly claim to the Inland Revenue from the pension provider.
It is even better news that the provision of waiver benefits will no longer be restricted to covering just the risk of long-term incapacity. IFAs will be able to obtain cover to provide for premiums to be maintained when other events occur, such as unemployment or redundancy.
Most of the panel were aware of the new rules. A number of different sources had been used to obtain information, the most frequently named being the trade press, followed closely by product providers, with many using their technical newsletters to develop the topic in more depth. Newsletters produced by networks or the Aifa were also mentioned as being valuable in explaining the changes.
While members of the panel were generally aware that changes would occur, 43% were unaware that, from April, the scope would be extended beyond cover against incapacity. When this was explained, a number of issues emerged.
On the positive side, 71% would seek to recommend cover against redundancy or unemployment if it were available. There were, however, concerns about difficulties with claim payments. Some IFAs felt that the cover was expensive and somewhat restrictive and that there was a reliance on small print to avoid paying claims. There is an issue here for those providers offering this form of cover to establish credibility for the product with IFAs so that these concerns can be overcome.
We asked whether integrated packages providing a pension plan and risk cover from the same provider, with claim payments made directly into the pension, would be attractive. A direct payment into the pension plan that would not permit the policyholder to take the benefit as an income was preferred and seen as entirely appropriate to meet the objectives of the contract. This is encouraging since this approach, with benefits directed to a stakeholder or personal pension, will be the most effective and ensure that benefits will not be counted for means-testing purposes.
There were some concerns that those offices that are competitive for investment products would be less so for the provision of risk cover. As a result, just over half of our IFA panelists prefer to source the risk and pensions benefits separately. Within this, they felt that the use of separate providers was more of an issue where larger premiums were involved but that, for smaller premium cases, there were advantages in simplicity.
It may be administratively more cumbersome where the risk benefits and pension benefits are sourced separately to achieve the payment of benefits directly into the pension plan. However, if most cases where benefits are sourced separately are the larger ones, means testing may be somewhat academic.
We were keen to establish whether there were any other concerns that would make the sale of risk benefits with pension plans difficult. We also wanted to identify the qualities that would make for a good plan.
It is clear that the marketing of schemes needs to be straightforward with easy acceptance for risk covers, perhaps by a simple questionnaire or declaration for all but the largest cases. Simplified underwriting is essential so that the sale of the investment product is not jeopardised by any delay in risk acceptance. At claims stage, settlement needs to be a prompt and efficient process, with clearly written product literature and benefit entitlements carefully described.
A number of IFAs were concerned about the complexity, both in terms of the implications of any changes to the tax rules and the consequent knock-on effects on the product. This suggests that a simple benefit structure should be adopted. The customer will need to understand that a net payment is being made into the pension fund, which is then topped up by tax relief. The link between the pension contribution and the amount paid into the pension on the occurrence of an insured event need not be precise. For instance, it would be far too costly to vary the amount of the net benefit upon a 1% change to the basic rate of tax, given that currently average regular contributions to personal pensions are just £80 per month.
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