Sales of pension term assurance (PTA) among mortgage advisers have gone through the roof since the product became available to IBOB-regulated brokers in April, but there are fears that in their rush to get on the PTA bandwagon, they may be putting some clients at risk.
PTA became part of the mortgage advisers product armoury following pension simplification changes which came into effect on ‘A-Day’, 6 April 2006.
In the months since, PTA has proved an extremely popular alternative to term assurance; it is cheaper because premiums can be written under pension rules and therefore contributions are tax free. It therefore gives clients tax relief on the premiums they pay, which is 40 per cent for top earners and around 20 per cent for standard rate tax payers.
This means clients get more insurance for their money – for every 78p premium a client pays, the PTA provider can claim 22p in tax relief from the HM Revenue and Customs. Higher-rate tax payers can claim 40 per cent but have to reclaim the extra above the standard rate through their annual tax return.
According to the Association of Mortgage Intermediaries (AMI), at least 50 per cent of all term assurance sales are made when a client takes out a mortage. PTA, although written under pension rules, is a standalone term assurance that does not have to be sold as part of a retirement planning package.
Changes to the ICOB rules, which coincided with pension simplification, now allow PTA to be sold as a pure protection contract; as long as its fits into the non-investment insurance definition, i.e. does not go beyond age 70, or be less than 10 years. If PTA falls outside this, it can only be sold by COB, or investment and pension specialist advisers.
Mis-selling risk
But there are fears that advisers who sell PTA may be placing themselves at risk of mis-selling it. Although it works like term assurance, all premiums paid and the amount insured count towards a client’s £1.5 million lifetime pension fund limit. This limit, introduced as part of pension simplification, means that a client whose fund exceeds £1.5 million this tax year risks paying a 40 per cent tax on any amount above that.
Although the limit is unlikely to impact on many of those who take
out PTA, there are other fears over the product’s suitability.
One fear has been that the Treasury may, at some point, decide to remove the tax-free status of PTA premiums. Andy Milburn, IFA marketing manager at Royal Liver, says that more and more mortgage advisers have switched to PTA instead of term assurance but that a large number had been ignoring the product over fears that the government would clamp down on it.
However the recent pensions white paper (end of October 2006) made no mention of PTA and he expects this ‘reassurance’ to encourage more sales.
Milburn points out that even if the government did remove the tax advantages of PTA, providers are offering switch options. These allow the PTA plan to revert to a normal term assurance plan, although the client will face higher premiums or even face having to have their assurance plan underwritten again.
Peter Chadborn, principal at Chadborn Baker & Kearle, says he is worried about the potential for misselling among mortgage advisers in particular.
“There are contrasting views and the issue of PTA has really split the industry,” he says.
Chadborn explains he is more comfortable with the idea of holistic advisers selling the product.
“In my view it really depends on whether you are a transactional or holistic adviser, that is whether you are making a recommendation of features and flexibility, not just because it’s a cheap product.”
Flexibility
Chadborn feels the market needs to mature somewhat, and that the PTA products available do not offer enough flexibility to mortgage intermediaries at the moment.
He says: “There are now around 10 providers and I’m sure more will follow. But even of these, only three will have the range and flexibility of normal term assurance.”
Such features include being able to extend or decrease the term, or to be extend or decrease the cover. But most important, says Chadborn, is the ability to switch back if someone is likely to breach their £1.5 million limit.
Under pension regulations, the lump sum insured under PTA counts towards the client’s lifetime allowance, which will restrict the amount of benefits that count as tax free, the excess incurs a charge.
Also advisers need to watch out for annual limits as tax relief on annual pensions contributions is limited to 100 per cent of the clients earnings or £215,000 per year. Those who don’t earn any money can put up to £3,600 per year into their pension, but if they save this amount and then pay extra in PTA premiums this will mean they breach their limit.
Contributing to PTA could invalidate any ‘enhanced protection’ put in place for pension arrangements. Chadborn says an adviser should opt for providers offering switch backs if they feel a client will go over the limit. “Royal Liver, Standard Life and Bright Grey, and recently Scot Equitable have introduced this facility but it often still has to be underwritten again, which could increase the term or remove the insurance altogether,” he warns.
Adviser question
Chadborn says the business model of the majority of the UK’s mortgage advisers means they are without the the input of a COB adviser. “Having someone with pension knowledge to hand within a business means that they have an expert to refer to if they do get a client who falls into the grey area – someone who may at some point breach that limit. I have no issue with ICOB advisers selling PTA, but they need to have access to advice when purchasing what is a pension product.”
Julie Smith, research manager at AWD Chase de Vere, says ICOB intermediaries who sell PTA need to introduce some kind of procedure in order for them to gather sufficient pension information from the client to determine if PTA is suitable.
Smith believes careful record-keeping may help to prove that the adviser has done everything possible to check that the client’s level of existing pension arrangement is safely under the lifetime limit. But the worry is that under Financial Services Authority (FSA) regulations, ICOB advisers are not under any statutory obligation to provide any warning to the client of potential unsuitability or even highlight to the client the fact they are not regulated to give pension advice.
Smith says: “The main concern for me would be if an ICOB intermediary did not ask the client the right questions about their existing pension arrangements and did not emphasise the fact they could not give advice in this area, as this could lead to potential mis-selling claims if, further down the line, the client faced over-funding tax charges.”
Lifestyle changes
It’s not just over-funding that places a client at risk of being mis-sold PTA. Changes in lifestyle could also make the product unsuitable.
Smith says all intermediaries selling PTA need to keep regular checks on their client.
“You have to keep a watch on your client’s situation. Moving abroad will make them ineligible to claim back the tax because you have to be UK domiciled to do so. In this case, having the ability to switch back into a normal term assurance is necessary.” Smith says providers such as Royal Liver and Standard Life are two examples of providers who allow such a switch if circumstances change, with the added advantage that new premiums will be same as before, but without the tax relief.
Changes of circumstances to watch out for include ill health, so if a client does have to switch because they are likely to breach the limit, they could find themselves having higher premiums or unable to insure themselves completely.
Other issues bothering advisers include the standalone nature of PTA – it cannot be combined with critical illness policy, for example.
Helen Pierson, principal at Stratford-Upon-Avon-based Halcyon Mortgages, says that for this reason alone, she is avoiding selling PTA.
“We are appointed representatives of Pink Home Loans and at the moment we are not allowed to sell PTA. The main problem is it’s a standalone product, so critical illness cannot be included. In many cases it is cheaper to buy normal term life insurance with critical illness combined than buying critical illness on its own.”
Chadborn also points out the fact that not all PTA policies allow waiver of premium.
“The cost of PTA is higher than the cost of ordinary term assurance and features like waiver of premium and critical illness cover are not allowed in a PTA contract and not all providers allow PTA to be written on a joint-life basis.”
General issues
Milburn says there are general issues to bear in mind. All mortgage advisers selling PTA should go for a reducing policy, but even then there may be issues of over or under insurance.
“Some PTA providers reduce their sum assured monthly while other providers only do it annually,” he explains. “Your client can end up being over-insured.”
But for the moment, questions over PTA are doing nothing to slow sales of the schemes.
Chadborn says: “Finally intermediaries have access to a life cover product that the supermarkets don’t, and for this reason it is becoming so popular. Time will tell, as the market matures as to whether it really is a suitable product for mortgage advisers to be selling.” mi
