Royal London will not be adding critical illness cover (CIC) to its relevant life plan (RLP), reviving a debate started at the start of 2016.
The mutual’s product architect Ian Smart explained it was possible to add CIC to its RLP, but only if the payment of benefits was linked to the retirement of the employee covered by the policy.
Mr Smart said the reasons for not combining the two covers was because it could leave the employee liable to a benefit in kind tax liability on the premiums paid.
He added: “Current critical illness definitions do not link payment to retirement, so such a policy would not meet the definition of a relevant
life policy.”
He said discussions with HM Revenue & Customs had clarified some queries in the ongoing debate, adding: “People would be better buying a CIC policy themselves rather than try to take advantage of any tax savings.”
Alan Lakey, senior partner at Hertfordshire-based Highclere Financial Services, said many insurers had investigated the potential of such a life plan, but had been unable to navigate the onerous requirements of legislation.
Aviva launched the first relevant life plan with integrated critical illness cover on 25 January. 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.
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.
Mr Lakey said last week’s decision by Royal London repeated other information he had heard regarding HMRC’s attitude to these plans.
He added: “While 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.
“It is a shame, because it is yet more evidence that at the Treasury there is a lack of joined-up thinking.”
peter.walker@ft.com
