Simplifying PTA

This article is about Pension Term Assurance (PTA). There, I’ve told you straight away. You can be in no doubt about what you will find in the paragraphs below. This week I’ve decided that being in doubt is not a good state of mind and have decided to be upfront about this article’s contents. Not for me the usual ‘waffley’ opening with references to the World Cup, Big Brother or the upcoming highlight of the summer, Celebrity Love Island.

I’ve also decided against my normal flippant opening. For example with PTA I could have written, ‘In case you were wondering what the hell Parent and Teacher Associations (PTA – geddit?) had to do with financial services, don’t panic, this article is about Pension Term Assurance. I’m not going to go on about the lack of discipline in our schools today, how exams are getting easier or the rise of the hoodies’. As you can see I’ve opted against that opening.

Instead I shall move on swiftly. You will of course be aware of the pension ‘simplification’ changes which came into effect on ‘A-Day’, 6th April this year. I write ‘simplification’ because, to the man in the street, the changes probably seem rather less than simple to understand. Then again, that’s why consumers need financial advisers.

It’s estimated that 54.5 per cent of all term assurance sales are made with a mortgage, and the pension simplification changes mean that mortgage intermediaries who hold general insurance mediation permissions will be able to provide access to PTA. The changes will now allow PTA to be sold on a stand-alone basis without the requirement for the client to also be contributing to a pension arrangement.

PTA is essentially a term assurance product written under pension legislation, which currently allows tax relief on premiums. Now that it can be bought separately from a pension, PTA can now be defined as a pure protection contract and can be sold under the Insurance Conduct of Business (ICOB) rules. This is providing that it meets the same definition as ordinary term assurance contracts which fit into the non-investment insurance definition, for example, such as the term must not run beyond age 70, or be less than 10 years. Policies falling outside of the definition can only be sold by those with the relevant permissions for investment permissions.

PTA could provide business opportunities but intermediaries must be aware that this is not a product you should be ‘filling your boots’ in. There are risks associated with the sale of PTA, and firms will need to put systems and controls in place to address and manage these risks should they decide to include it in their firm’s product range.

AMI has published a factsheet to help members consider the opportunities and potential risks in selling PTA. Any firm which operates on the basis of ‘fair analysis’ for term assurance contracts should read it to ensure they are aware of the impact these changes will have on compliance with the FSA guidance on fair analysis. The factsheet provides information on the ICOB rule requirements for PTA, as well as outlining other areas of the FSA handbook which will need to be considered before deciding whether or not to offer PTA.

Space does not allow me to cover all of the factsheet’s topics but there are some important issues relating to PTA that intermediaries need to be aware of. They are:

• The cost of PTA is higher than the cost of ordinary term assurance.
• Waiver of premium and critical illness cover are not permitted in a PTA contract (although these are sometimes made available as a stand-alone contract with no tax relief on premiums).
• Not all providers allow PTA to be written on a joint-life basis.
• The taxation benefits available on PTA could change in the future.
• In the event that circumstances change (for instance, the lifetime limit is breached or near to breaching) contracts without a replacement option could need to be terminated, (leaving a client in declining health with potentially higher premiums or unable to insure themselves) or the lifetime limit could be breached incurring a tax charge of 55 per cent on the excess.

There are also specific risks associated with the sale of PTA compared with ordinary term assurance. These include:

• The lump sum death benefit under PTA counts towards the overall ‘lifetime allowance’. The lifetime allowance restricts the amount of benefits which can be paid free of tax relief from pension arrangement. If the limit is exceeded the benefits payable beyond the limit are taxed at 55 per cent.
• Tax relief on annual pensions contributions will be limited to the higher of 100 per cent of earnings or £215,000. Non-earners can contribute a maximum of £3,600 per annum. Breaching this limit will affect the level of tax relief granted.
• Contributing to PTA could invalidate any ‘enhanced protection’ put in place for pension arrangements.
• Clients could mistakenly think that PTA will provide them with a pension.
• Cancellation and replacement of existing term assurance benefits will require careful consideration before proceeding.

These issues and risks are just two parts of the factsheet. Other areas covered are: the ICOB rules, the relevant pension and taxation rules, trusts, cancelled and replaced policies, Training & Competence considerations, compliance monitoring arrangements, PII arrangements and the factsheet also includes a PTA checklist.

AMI members can access the PTA factsheet on the publications section of its website at: www.a-m-i.org.uk/closed/cug/publications.asp