The FSA is amending its ICOB sourcebook to allow pure protection advisers to offer consumers pension term assurance from April 2006, albeit with enhanced requirements.
Under current rules, only advisers working under the investment-oriented Conduct of Business Sourcebook are allowed to recommend pensions term assurance(PTA) to clients, as current rules only allow PTA to be sold with a pension.
However, in proposed amendments to rules governing such products, the FSA notes just 1% of all term assurance policy sales are in PTA and changes to the pensions regime post A-Day should make it easier for consumers to consider taking out life cover, so alterations to the Insurance Conduct of Sourcebook will allow intermediaries to make recommendations for PTA as a standalone pure protection product.
Changes to PTA follow lobbying from the protection industry which suggested Existing rules governing pension term assurance were too complicated to make the product viable, but needed some protections to ensure consumers understood the potential risks attached to their pension arrangements.
As a result of that feedback, intermediaries will need to follow “ICOB +” rules on PTA and know the tax limits related to pensions as well as completed the necessary checks and communicate the possible risks to consumers, to ensure there is no detriment to the consumer, says the ,a href="http://www.fsa.gov.uk" target="_blank">FSA.
The FSA’s quarterly consultation on COB rules - CP05/14 - points out there are still some risks to advice on PTA products, as the lump sum death benefits of a policy count towards the overall lifetime allowance - £1.5m from A-Day and rising to £1.8m by 2010/2011 – and consumers could face an additional tax bill on benefits payable if they cross that limit.
Advisers recommending PTA will need to issue clients with a risk warning and conduct a client suitability assessment although the FSA has left it to intermediaries to decide how best to meet that requirement, says Stephen Crosbie, product development manager at Scottish Equitable Protect.
Higher-rate taxpayers may want to take up PTA to gain the tax relief on the premiums as this is likely to work out a cheaper option for life cover than level term assurance, once the tax relief is earned and even though some PTA policies are around 20% more expensive than LTA.
That said, moves to expand the regulation of PTA should benefit consumers and the cost of premiums could come down if it encourages new entrants into the market, says Kevin Carr, senior technical adviser at Lifesearch.
“The product will be less complex but we don’t know what the market will look like, we don’t know how many products will be competitively priced but we don’t think the market will look particularly different,” says Carr.
“But some providers, such as Norwich Union and L&G, might be concerned about protecting their existing books of business, as new firms might price into the market more aggressively and we could end up with a price war,” he adds.
Although it will not be clear exactly how many providers are willing to provide PTA from April 2006, recent new entrant to the protection market, Andy Milburn, IFA market manager at Royal Liver, says it is currently looking at the possibility of entering the PTA sector, although how products might be designed will depend on “what can and cannot be included” as part of the PTA proposition.
“The real issue is what is going to be allowed, such as whether it can include decreasing term and terminal illness cover,” says Milburn.
“There could be a whole new support market created because products will not be able to carry the extras consumers might want, such as waiver of premium, which may not be entitled to tax relief on the premium. It looks, for example, as thought PTA might have to be paid as a lump sum rather than allowing it to be in regular payments similar to family income benefit.”
The FSA points out, for example, PTA may not suitable because “it cannot offer additional features such as critical illness cover, waiver of premium option and cover on a joint lift basis”.
Carr says while there is still no mention of it at this stage, the industry had hoped the ability to include terminal illness as an add-on term to PTA would be permissible as well as the guaranteed insurable option, which would allow the sum assured of a policy at a later date if necessary.
There could also be an unintended benefit for independent financial advisers on the horizon, adds Carr, as the additional complexities PTA appears to create in relation to the tax regime could make it difficult for non-advised products to hit 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 Julie Henderson on 020 7968 4571 or email [email protected].IFAonline
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