A retirement expert has raised concerns at how an existing pension term assurance policy can pose annual allowance problems for policyholders.
Les Cameron, head of technical services at Prudential UK, warns that those with older policies may find their ability to contribute is being restricted by the annual allowance if they are actively seeking to maximise their retirement income funding.
He says pension term policies can use up annual allowance, including those protected policies that receive tax relief and are at least 14 or 15-years-old, but not for policies after this date.
“So, the question of pension term policies causing annual allowance issues only arises with older policies," Cameron explains. "The only potential issue would be where someone is actively seeking to maximise their retirement income funding but their ability to contribute is being restricted by the annual allowance used or they have had an annual allowance excess and this is higher than it would otherwise be due to it."
He adds that when this happens, it is important to weigh up if the benefit of any new policy is worth sacrificing the tax relief from the existing terms.
Weighing up the options
Cameron says: “Any replacement life cover would not qualify for pension tax relief and given that the person is going to be at least 15 years older, the terms they receive may be for poorer than what they currently have.
"A trade off then has to be considered; whether the best course of action is to give up your tax relief and existing terms – securing alternative life cover and so allowing additional pension funding – or whether it is best to do additional retirement funding elsewhere such as an Isa, other investments or even by paying into the spouse's pension, and leave the term policy in place.”
Until the end of 2006, PTA was available as a form of life insurance that could be bought as part of a pension plan complete with the associated tax breaks.
While this sort of policy is no longer available to new customers, those with such policies active are still entitled to continue them, and to enjoy the tax advantages they come with.
Cameron says another option is to ask if the pension term policy can be amended by extending the term, which would mean it would cease to be a protected policy, no longer using annual allowance, leaving space for more retirement income funding.
This was echoed by Fiona Tait, technical director at Intelligent Pensions, who says that if extra cover is required as the result of changes in the client’s circumstances, then it is necessary to consider whether the existing policy delivers more value than a replacement life assurance policy.