Pension term assurance

The lure of a tax break on premiums resulted in pension term assurance (PTA) becoming a UK bestseller following Pensions Simplification in 2006, or A-Day as it is otherwise known.

Later that year the government realised that it was a bit too good as it was costing way too much! Consequently, it enacted legislation that meant the end for PTA.

I can remember sitting in meetings with industry bodies and Government ministers debating how much extra money would go towards pensions following the creation of PTA. 

Very little, I said, pointing out that the biggest change would simply be to switch life cover to save money. When it was pulled less than a year later there were hints that advisers were to blame for the saved money not reaching the pension funds. 

However, anyone who applied for and bought one of these policies before the u-turn was allowed to carry over the cost indefinitely and continue to benefit from the tax advantages: premiums paid from pre-tax income, as per pension contributions; unlimited potential spend on the policies; and the ability to take out a policy without having to make pension contributions.

For those individuals, there are a number of important considerations. “Unfortunately, because PTA is no longer available for new customers, clients needing to alter cover due to changing circumstances will typically need to take out new cover, leading them to forego the benefits of tax relief, but that could be a price worth paying if cover is unsuitable,” says Ms Thomson.

“It’s important to note that on 6th April 2016 the Lifetime Allowance [the maximum allowable for tax free pension contributions] reduced to £1m and pension term policies, like death in service, will be taken into account. So anyone who has breached, or could breach, the £1m limit should seek advice as to the best course of action.”

In addition, there could be an impact upon any customers who already exceed the Lifetime Allowance and have applied for enhanced protection of any money over the limit. In this situation, any premium paid into a PTA policy could invalidate the protection, triggering a tax charge.

Kevin Carr is managing director of Carr Consulting and chief executive of the Protection Review.