Concerns have been raised about the future of pension term assurance, following comments from Ed Balls stating the government "will act" when a regime is not in accordance with its pensions tax relief principles.
Speaking at a National Association of Pension Funds (NAPF) conference, Balls states: “We will need to respond to circumstances which risk taking us away from [the pensions tax relief] principles – or when the market seeks to identify loopholes in legislation that permit behaviours that were clearly outside the original intentions of that legislation.”
The principles Balls refers to include not using pensions tax relief to support pre-retirement income, asset accumulation and inheritance.
He adds: “We do not want to stifle innovation or prevent the industry from responding to new challenges. But there have been and will be times when the government needs to act to respond to the use of the regime that is not in accordance with these principles. And the more transparent we can be about our principles and intentions, the less likely we are to have misunderstandings on the way.”
Nick Kirwan, chairman of the Association of British Insurers’ (ABI) protection committee, says it is very worrying Balls might be suggesting PTA is not in accordance with these principles and is something the government needs to act on.
He states: “If Balls is referring to PTA as a tool for asset allocation or inheritance then he is missing the point. PTA is about protecting someone’s family and I don’t think there has been any misuse of the rules. It is worrying that Balls might think that is what PTA is being used for.”
Roger Edwards, products director at Bright Grey, says: “It certainly sounds like the government is reducing the level of expectation over PTA. It doesn’t necessarily mean a decision has been made to pull the plug for good, but I don’t think we’ll be going back to where we were before the Pre-Budget.”
He believes Balls' suggestion the industry discovered a loophole and exploited it are “complete nonsense” because the industry made it clear to the government before A-Day PTA would be used as a standalone product.
Edwards adds: “It seems like Balls is suggesting the industry was sneaking around in the background, but it was always an open discussion and it is insulting to suggest the industry did something clandestine.”
The ABI has today published a letter from its director general Stephen Haddrill to Balls in a last-ditch attempt to save PTA by outlining ways of linking the product to pensions.
The proposals include:
- At the point of sale, all PTA offers would contain clear information about the pension they were linked to and a contract under which contributions would be made on a continuing basis;
- When making a claim the claimant would need to show the pension remained in place;
- After a sale insurance companies would sample policies to check for levels of fraud;
- Tax relief would be at the lower rate (22% or as amended by the government) and higher rate tax relief would only be available by application on an income tax return; and
- There would be a ceiling on the limit of PTA purchasable, possibly a fixed percentage of the lifetime allowance
But Rachel Vahey, head of pensions development at Aegon Scottish Equitable, believes the ABI's proposals are unworkable and could lead to providers withdrawing from the market.
She states: "Although we understand the ABI's position, we do not think this is a workable solution for providers or for customers. At the very least, it will introduce a need for additional resource from providers, which will be met ultimately in adjusted costs for customers. Ultimately, it could mean providers withdrawing from the market."
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7034 2680 or email [email protected].IFAonline
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