Royal London has said it will not be adding critical illness cover (CIC) to its relevant life plan (RLP), reviving a debate started at the start of this year.
The mutual’s product architect Ian Smart explained it is possible to add CIC to its RLP, but only if the payment of benefits was linked to retirement of the employee covered by the policy.
“Current critical illness definitions do not link payment to retirement and so such a policy would not meet the definition of a relevant life policy,” he stated.
“There may be no tangible tax benefit to the employer or the employee and this could potentially leave the employee liable to a benefit in kind tax liability on any premiums paid.”
Mr Smart said discussions with HM Revenue & Customs clarified some queries in the ongoing debate, adding: “My personal opinion is that people would be better to purchase a CIC policy themselves rather than try to take advantage of any tax savings.”
On 25 January, Aviva launched the first relevant life plan with integrated critical illness cover, with managing director of protection Louise Colley calling it a market first.
“Historically, relevant life policies have tended to only include a death benefit and terminal illness benefit, so I am delighted that, following extensive research and advice from external legal counsel, we are able to offer a fully compliant critical illness benefit on our new relevant life insurance,” she stated at the time.
Alan Lakey, senior partner at Hertfordshire-based Highclere Financial Services, explained many insurers had investigated the potential for such a plan, but had been unable to navigate the onerous requirements of legislation.
However, a few days later, Legal & General took issue with the product and said it would raise its concerns with HMRC.
Richard Kateley, head of intermediary development at L&G, said the addition of critical illness conflicts with the market’s current interpretation of what is allowed within a relevant life plan as laid down by the Income Tax (Earnings and Pensions) Act 2003.
In an update at the end of July, L&G stated if it were to add critical illness benefit to a relevant life plan, this could lead to policyholders losing the beneficial tax treatment that relevant life currently provides and makes this product so worthwhile.
Any attempt to claim the premium as an allowable expense for a critical illness may lead to the creation of a tax issue for the business and/or the individual, if the policy covers conditions that are not guaranteed to lead to early retirement, L&G noted, adding it would not be complaint to add CIC.
Aviva responded at the time that it had liaised with HMRC and took legal advice from a QC who confirmed that the product was compliant with the relevant legislation and therefore qualified as a relevant life plan.
HMRC would not clarify whether critical illness can be added to a relevant life plan without changing a policy’s tax status.
At that stage, Mr Smart said he was looking closely at the debate to form his own opinions, but shared concerns that this could prompt HMRC to think again about whether the legislation around relevant life policies is working as originally intended.
Mr Lakey stated today’s decision by Royal London repeats other information he heard regarding HMRC’s attitude to these plans.
“Whilst a relevant life plan with CIC uses the same condition wordings as a non-relevant life plan, one important difference is that relevant life cannot include children’s cover, so there might be a downside to somebody effecting a relevant life plan, even without the tax advantages,” he said.
“It is a shame, because it is yet more evidence that at the Treasury there is a lack of joined up thinking. Tax advantages are given to pensions because the government recognises people need an incentive to put money aside and this reduces the impact on the exchequer.
“If common sense was in vogue they would similarly recognise the benefits of incentivising critical illness and income protection as this would increase the uptake and also reduce the financial impact on various state benefits,” Mr Lakey stated, adding: “This may well kill off the concept of relevant life with CIC and that would be a shame.”
peter.walker@ft.com
