Pension term assurance is a type of life insurance policy which, for a while during the last decade, was very popular due to its tax advantages.
This type of cover is no longer available for new customers, but those who managed to take out policies can continue to have tax relief added to their premiums, thus reducing the cost of the insurance.
How pension term assurance started
In April 2006, widespread changes to Britain’s pensions legislation created a situation where consumers could buy life insurance as part of their pensions, and get tax relief on their premiums in the same way as on pension contributions.
A number of insurers launched cover specifically to take advantage of this change, under the label pension term assurance.
With the basic rate of income tax 22 per cent at the time, it meant that policyholders could pay for £100 of premiums with just £78 — the difference was made up by government tax relief.
Higher-rate taxpayers could claim further relief through their self-assessment tax returns.
Prior to April 2006, this kind of arrangement had still been allowed, but the rules restricted the value of premiums paid every year to just 10 per cent of the policyholder’s annual pension contribution.
This meant that someone paying £1,000 a year into their pension could spend up to £100 on life insurance premiums and receive tax relief on the lot.
But the 2006 changes meant that the amount spent on pension term assurance was effectively unlimited — and customers could even take out one of these policies without having to make pension contributions.
The loophole closes
Later in 2006, however, the government realised it was costing too much to continue offering tax relief on life insurance policies in this way, and it enacted legislation that meant the end of pension term assurance.
However, anyone who applied for or bought one of these policies before the U-turn was announced on 6 December 2006 was allowed to carry over the cover indefinitely, and continue to benefit from the tax advantages. (The cut-off for policies being set up was the end of July 2007, although government rules stated the initial application for the cover had to have been made by 6 December 2006.)
Pension term assurance may no longer be available, but there are thousands of policies still in force that continue to operate under the 2006 rules.
What to do if you are a pension term assurance policyholder
The tax benefits of pension term assurance, and the fact that these policies are no longer sold, means care should be taken if you want to change your cover or switch to a new type of insurance.
If you do want to change provider, bear in mind that you will no longer be entitled to tax relief on your premiums. But this does not necessarily mean that your cover will be more expensive as a result of switching. Compare prices to see whether you could get the same amount of protection at a cheaper rate.
If you have suffered health problems since you originally took out your policy, however, this is likely to make the premiums on a new deal more expensive.
And if you want to change your pension term assurance because you think it no longer provides sufficient cover, check your policy’s terms and conditions: you may be allowed to increase the level of cover by paying higher premiums while remaining entitled to tax relief.
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