Pensions term assurance in chaos

The market for pensions term assurance - a way of getting cheaper life insurance by using pension tax breaks - has been thrown into "chaos".

In yesterday's pre-Budget report the chancellor announced that from close of business yesterday the rules surrounding pensions term assurance would be changing.

Pensions term assurance policies mean it is possible to take out a 'pension' life policy - without making pension contributions - and get access to tax relief savings deducted at source.

Pensions term assurance is available regardless of whether you have a pension or not, it offers basic-rate taxpayers up to 22 per cent tax relief on their premiums with higher-rate taxpayers able to claim another 18 per cent back through their tax returns.

The product proved so popular that, eight months after its launch, almost one in ten life insurance customers have such a product.

But as of yesterday there are large questions over whether the tax relief will continue to be available.

"A single, vague paragraph [in the pre-Budget report] straight out of the blue throws their situation into chaos," said Emma Walker, protection manager at price comparison website Moneysupermarket.com.

"It's clear the tax relief is already costing the Treasury too much, hence this thinly-veiled crackdown."

She added: "We have made a provisional decision not to recommend pensions term assurance until the industry has a clearer understanding of the government's intentions."

What the pre-Budget report actually said

"The government has become aware that, as a result of the flexibilities that the new pension tax regime has brought in, life insurance policies that provide lump sum death benefits alone are being offered as personal pension arrangements eligible for pensions tax relief.

"This undermines the principals set out above [that pensions offer tax relief on contributions to provide an income in retirement].

"The government will therefore work with the pensions industry to explore in time for the Budget [in spring], how the principals can be applied to pensions term assurance contracts.

"Any changes the government decides to make will not effect either personal arrangements entered into before December 6th 2006 or existing types of employer arrangements."