The A-Day changes have made PTA product of the day for all market advisers, but in being too specialised does it mean sour grapes for others? Samantha Downes investigates
Pension term assurance (PTA) has fast become the product du jour, a term assurance policy that offers the retirement-planning benefits of tax-free contributions.
But changes to the Financial Services Authority's (FSA) conduct of business rules, which from April this year allowed brokers specialising in general insurance to sell PTA, are now being questioned over fears the product is too specialised to be sold by anyone other than those advising on pensions.
Since the changes, which were brought in as part of A-Day or pension simplification on 6 April 2006, demand for PTA is estimated to have surged by over 1000%.
So far 10 providers have put their hat in the PTA ring: Bright Grey, Bupa, Friends Provident, Legal & General, Liverpool Victoria, Norwich Union, Scottish Provident, Scottish Equitable, Standard Life and Royal Liver.
Other providers such as Axa and Scottish Widows are expected to launch PTA offerings within the year.
No exact figures on the proportion of insurance conduct of business (ICOB) to conduct of business (COB) advisers selling PTA are available, but it is estimated that 60% of all advisers are now selling PTA.
Andy Milburn, IFA market manager at Royal Liver, says: "We believe more than 50% of all advisers are now recommending PTA. But there is still a large number who are completely ignoring the product. We don't have a breakdown of how many are ICOB-registered advisers, but anecdotally we believe a substantial number of those selling PTA are ICOB."
Ian Jefferies, head of protection marketing at Friends Provident, says it has not recorded which type of adviser is selling PTA.
"We don't record which ones are COB or ICOB. However, it's likely that most of the business in the PTA market is from ICOB regulated advisers, because it's in line with standard term business that is mortgage related."
With many advisers now believed to be selling PTA instead of term assurance, there are fears of churning, but on the whole Milburn believes PTA is a superior option to term assurance.
He says this is because a new generation of PTA products, which has level and decreasing sum assured policies has been designed in the post Treating Customers Fairly (TCF) climate.
Kevin Carr, head of protection strategy at LifeSearch, is also confident most advisers are recommending PTA on a TCF basis.
He says: "PTA gives clients tax relief on the premiums they pay, which is 40% for top earners and around 20% for standard rate tax payers."
This means clients get more insurance for their money - for every 78p premium a client pays, the PTA provider can claim 22p in tax relief from HM Revenue and Customs.
The only real complexity that Carr can see is when a client's pension fund, combined with the sum assured on their PTA policy breaches the £1.5m contribution ceiling, introduced under A-Day rules.
"A lot has been made of the fact that once you breach this limit you incur a 40% tax charge and this is something advisers have to watch out for. If you apply for enhanced protection, simply paying into a PTA will incur the charge," says Carr.
But he adds that realistically very few people will reach that limit, and if they are in that league of saving, it is very likely they will not be using an ICOB adviser.
Although subject to pension rules PTA is effectively a hybrid product, in that it pays out on death, which can itself be mis-leading because "if it doesn't pay an income in retirement it is an insurance policy".
"Maybe the name should be changed," Carr adds.
But the biggest risk for advisers wanting to sell PTA is not within the advice process itself, though likely changes to the taxable nature of the premiums will mean that, if tax relief is no longer available, someone with a PTA policy may be faced with paying a higher premium than they had.
One fear is that the Government may review the tax-free nature of PTA contributions. But even in that case providers have put in place switching procedures that will allow people to swap to a term assurance policy. But the Government's most recent White Paper on pensions - published on 30 October - already appears to have helped dismiss fears that any immediate change is imminent.
Milburn says: "There's been a lot of talk that the Treasury will clamp down, but in the White Paper there was no mention of anything. I would say that for the meantime PTA is safe."
Richard Verdin, sales and marketing director of Direct Life & Pension Services, claims that even though PTA is suitable for most clients, there are too many contradictions in the advice process.
He says: "The initial disclosure document tells the client that they can give advice but the suitability letter explains that they cannot advise as to the suitability of selling PTA regarding their pension provision."
Verdin claims the issue could be solved by enforcing an industry standard qualification among the life insurance advice community. This would in turn give advisers some guidance on selling a pension-related product.
He does not agree that most ICOB advisers have access to COB regulated counterparts and this is why many are still choosing not to sell it.
Agreeing with Verdin, Julie Smith, research manager at Chase de Vere Financial Solutions, says advisers should be wary.
"There is still a chance that in the future there will be a change of legislation. If so advisers need to be prepared."
She asks: "Will policyholders be able to switch back to an ordinary term policy? If so, what rates will apply and will new underwriting be required? If not, consumers could be forced to pay the gross premium, which could be around 20% higher. There are a lot of variations between companies as to whether someone can switch back into a term assurance policy."
She points out that some providers offer a switch should there be a change in legislation, whereas others offer a switch if client's circumstances change or they approach the lifetime limit. Smith adds: "Another point to watch out for is if the new term assurance will be on old or new rates. If new rates apply, this would potentially be a lot more expensive as you'll be older and may have had changes in health."
Government u-turns aside, other things advisers need to watch out for are the health of their clients. Carr says if someone's health has deteriorated since taking out a term assurance policy, they may find the premiums for a new PTA more expensive.
Smith says there are other circumstances that could lead to mis-selling. For example, if a client is a lower-rate taxpayer and is only paying a small monthly life assurance premium, switching to PTA may not be cost effective. Advisers also have to check whether the original life cover had an accelerated critical illness (CI) benefit.
She adds: "If so, and you decide to rebroke into a PTA contract, CI will have to be set up as a stand-alone plan as it cannot be held within the tax efficient wrapper. Therefore, although you may have, in effect, double the cover, you may also be paying double the price."
Other reasons for not taking out PTA include the potential for a change in the client's circumstances. Smith says tax relief on a PTA could also be lost if you change career, move abroad or become unemployed, while existing policy benefits - such as CI, waiver of premium, terminal illness, guaranteed insurability, indexation or conversion options - could also be lost.
Smith adds: "If you know a client is going to live abroad then there could be cause for mis-selling because you are only eligible for the tax back on premiums if you are UK domiciled."
Carr however, thinks PTA remains a viable option. "For at least 97% of the population it's the best way of buying life assurance. There are a small number of people for whom it is not appropriate," he says.
So far, Friends Provident does not foresee any issues with ICOB advisers selling PTA and it does not anticipate any.
Jefferies says: "Following the FSA guidelines we have placed very clear warnings and explanations in our illustrations and key facts documents of the potential pitfalls around the lifetime allowance. Also, customers that have built up large pension funds are likely to have full financial provision in place covering the range from protection to investment and so are likely to have a COB adviser."
Jefferies points out there is also a duty on advisers, whatever regulatory regime they fall under, to ensure the advice process covers the risks of the product they are being sold.
"One concern when PTA was introduced was availability of the product to as wide a section of the market as possible. A lot of life cover is sold alongside a mortgage as part of sensible financial planning and it would be unfair to make it harder for customers to benefit from the potential savings available with PTA."
Like Carr and Milburn, Jefferies sees PTA as a straightforward product that can be explained succinctly as term assurance with tax relief.
Milburn says the best way for advisers to protect their clients and themselves is to have a checklist. "We've published an online guide and all advisers should have checklists to make sure, but I think there are other issues in the industry that are far more pressing than sales of PTA."
Samantha Downes is a freelance journalist
