BN18 - Tax Relief on Personal Term Assurance

Who is likely to be affected?

1. Scheme administrators, members of registered pension schemes and their dependants, insurance companies and financial advisers.

General description of the measure

2. The measure removes an individual’s entitlement to tax relief on any pension contributions they pay that are used to fund personal term assurance policies. It does not affect the relief available for contributions paid by employers.

Operative date

3. For contributions under occupational registered pension schemes, this measure will have effect for all contributions made on or after 1 August 2007 in respect of personal term assurance policies, unless the insurer received the application for the policy before 29 March 2007 and the policy was taken out as part of the pension scheme before 1 August 2007.
4. For contributions under other registered pension schemes, it will take effect for all contributions made on or after 6 April 2007 in respect of personal term assurance policies, unless the insurer received the application for the policy before 14 December 2006 and the policy was taken out as part of the pension scheme before 6 April 2007.
5. Where relief remains available for contributions paid on or after 1 August 2007 (for occupational schemes) or on or after 6 April 2007 (for other schemes), the individual will cease to be entitled to relief if the policy to which the contribution relates is varied outside its original terms so as to increase the sum assured or lengthen the term. However, if there is an option under the policy which is then exercised this will not affect the relief due.

Current law and proposed revisions

6. Term assurance policies are life insurance policies that only pay benefits on the death or critical illness of insured persons. When taken out outside a pension, there is no tax relief on premiums and no tax to pay on lump sum benefits.
7. As part of pensions tax simplification, the previous limits on the provision of death benefits through registered pension schemes were removed from 6 April 2006. This enabled a term assurance policy to be sold with pension tax relief so long as the policy terminated before the 75th birthday of the insured individuals.
8. The member gets tax relief on contributions under the scheme that are used to pay for the term assurance policy but if the member dies and the insurance policy pays out the death benefits these will not normally be taxable but may be subject to the lifetime allowance charge if, when aggregated with other benefits from registered pensions schemes, the lump sum death benefit exceeds £1.5m in 2006-07 (£1.6m in 2007-08).
9. The change to be introduced in Finance Bill 2007 will mean that individuals will no longer get tax relief on pension contributions that are used to pay premiums under personal term assurance policies. A term assurance policy will be regarded as personal to the individual if it terminates the first time an insured person dies, as with all single life policies and most joint life policies, or if all the insured individuals are members of the same family.
10. The Finance Bill legislation will also provide new powers to pass secondary legislation which will enable the Government to act quickly to remove relief from new products sold with a view to avoiding the new restrictions on tax relief. This supplements existing powers that provide for specified types of payment by registered pension schemes to be treated as unauthorised payments.
11. The Government is happy to hold further discussions with the industry between publication and Finance Bill Committee Stage about the detail of the draft legislation in order to ensure that the measure only affects the policies and contributions it is intended to catch.

Further advice

12. These changes are included in the full Regulatory Impact Assessment published today.
13. If you have any questions about this change, please contact the Pensions Helpline on 0115 974 1600.