ABI: Budget measures need to go further and faster
Stephen Haddrill, the ABI’s Director General, said:
“The Budget is a start towards revitalising saving in the UK, but its measures are meagre set against the scale of the problem. We need to move further and faster”.
Pension Term Assurance
Stephen Haddrill said:
“We were disappointed at the scrapping of Pensions Term Assurance only eight months after its introduction in April 2006. It will mean many families do not have the protection they need, and has cost the insurance industry millions. We need to learn lessons from this. And there remain serious problems with the transitional arrangements, which are now over-complicated. These need to be scrutinised and simplified urgently”.
ISAs
Stephen Haddrill commented:
“We welcome the support for savers and in particular the increase in cash ISA limits. But the change to the overall investment limits is meagre and falls short of inflation since ISAs were first introduced. We hope the Government will continue to increase the limits further in future years”.
Income Tax
Peter Vipond, the ABI’s Director of Financial Regulation and Taxation, said:
“Next year’s reduction in the basic rate of income tax will give people more disposable income, and therefore more opportunity to save. The Government must now work with the FSA to make saving as easy as spending”.
Tax regime for life and general insurers
Peter Vipond said:
“The Finance Bill will include a number of measures aimed at simplifying and modernising the corporation tax regime for life and general insurers. These are the result of extensive consultations between HMRC and the ABI. We think that the changes will be beneficial in reducing the administrative burden on the industry. Work is continuing on these measures and we expect to consult on more reforms over the coming year”.
2. Pension Term Assurance (PTA)
PTA is a type of term life assurance policy. Unlike normal term assurance or mortgage term assurance products, policyholders with PTA benefit from receiving tax relief on the premiums paid at their marginal tax rate, in the same way they do for a pension product.
This means that the actual premium paid is increased by an amount of tax reclaimed from the Revenue. This additional contribution from the Government means that the level of cover provided under a PTA contract is higher than if an individual paid the same contribution into another type of term assurance product.
Before April 2006, the rules for PTA stipulated that premiums paid into a PTA policy had to be limited by the amount of pension contribution an individual made. This made explaining entitlement and administration of the system complex, so few people used PTA.
From 6 April 2006 (Pensions A Day), the Government changed these rules to allow individuals to obtain cover under PTA without any direct link to having a pension or making pension contributions, although any cover obtained would count toward the new pension lifetime allowance limits.
The reason given for this change at the time was to allow those in non-occupational pension schemes, such as the self-employed, to benefit from similar rights to those provided in occupational schemes, such as having access to life cover, within the pension regime.
In the Pre Budget Report, 8 months after these changes came into effect, the Government announced it was to cease provision of tax relief on PTA. This caused confusion and uncertainty for PTA providers and consumers who had taken out PTA products before the announcement on 6 December 2006, where the application had not been processed or finally accepted by the consumer prior to the cut-off date.
Swift lobbying from the ABI forced the Treasury and HMRC to issue a statement making it clear that such applications, if valid once processed, would continue to benefit from tax relief provided they had been received by the insurance company by midnight on 13 December.
Since December, the ABI has been involved in detailed discussions with the Treasury and HMRC to work towards establishing whether the government believe there can be a viable future for PTA.
Even over the very short time between April and December 2006, the indications were that people taking out PTA were mainly the key target group for government concern – both on pensions and the protection gap – the younger, less affluent in society who were less likely to have established pension provision.
The insurance industry believes that PTA is a valuable product for consumers. It enables the policyholder to protect their family in the event of their death, often a time of substantial financial uncertainty. The ability to benefit from this protection could also continue even if that person could not continue to contribute to their pension, for example because of financial or health reasons. Such protection can minimise the risk that families have to fall onto the state for support.
The industry is concerned that the government’s requirement for policyholders to have a continued pension contribution could adversely affect those individuals who most need the benefit of protection, for example, those who are:
. Between work, work part-time so have little other pension provision, rely on obtaining temporary contracts of employment, and the self-employed who may not always have sufficient income to make ongoing pension contributions
. Unable to work due to ill health and cannot afford to continue making pension contributions, and who may have lost their job and so any employer contributions, but who would be unable to purchase protection at a reasonable price at that time.
The ABI believes it is wrong that such individuals should be forced to lose the right to valuable protection at times when they are most vulnerable.
3. The ABI is the trade association for Britain’s insurance industry. Its nearly 400 member companies provide over 94% of the insurance business in the UK. It represents insurance companies to the Government, and to the regulatory and other agencies, and is an influential voice on public policy and financial services issues. ABI member companies hold up to a sixth of all investments traded on the London Stock Exchange, on behalf of millions of pensioners and savers.
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