The removal of tax relief on pension term assurance policies removes the risk of people taking out life insurance policies which are unsuitable for their needs, claims HMRC.
HMRC has published a regulatory impact assessment on its decision to remove tax relief on new PTA policies, which claims the measure gives rise to benefits for consumers, improves market efficiency and protects the taxpayer.
It states: “The measure will benefit consumers in that it mitigates the risk of people taking out life insurance policies that may not be suitable for their needs and which, apart from the relief, are generally more expensive.”
HMRC claims the measure will ensure consumers take decisions about life insurance on the basis of their personal needs and not on the basis of the tax relief.
In addition, it says the measure removes a significant tax distortion from the life insurance market and therefore promotes market efficiency.
It states: “It is expected that most consumers that were drawn to term assurance policies offering pensions tax relief following the A-day chances will revert to life insurance policies outside of a pension and that providers will return to selling life policies solely on the basis of commercial considerations, not tax relief.”
HMRC says it recognises providers will have incurred costs in anticipation of business volumes which are no longer likely to arise and on product design, administrative systems and marketing, but it believes the removal of tax relief means the costs are “one off” costs to the industry.
It adds: “Longer term, the removal of tax relief for pension life insurance means that the market should revert broadly to the position before A-day, where life insurance sales growth was focussed predominantly on business outside of pensions. Industry costs should therefore reflect the normal costs of life insurance business and so the impact on long-term (‘steady state’) industry costs from this measure should be negligible.”
Nick Kirwan, protection market director at Scottish Widows, says: “I think the suggestion that the removal of tax relief brings benefits for consumers is surprising because I believe most people know the difference between life and health protection. It is of significantly more benefit to consumers to have an incentive to protect their families.”
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