Due to the changes relating to Pensions Simplification, there is plenty to think about in respect of Pension Term Assurance.

Under current pension legislation, PTA premium payments can only be made alongside other pension contributions, which are subject to eligibility criteria and strict limits on contributions. These restrictions surrounding PTA mean that it represents less than 1% of term assurance sales. The pension tax simplification changes coming into effect on 6 April 2006 (A Day) will alter the sale of PTA.

From A-Day it will be possible to sell PTA without customers having to also make pension contributions for retirement benefits (standalone PTA). Essentially, this will be a term assurance product that will benefit from tax relief on premiums written within a personal pension scheme. Some insurers may charge higher premium rates for PTA than for ordinary term assurance (OTA) because of the taxation of their pension and life funds, so the savings generated by the tax relief on premiums (22%, or 40% for higher rate taxpayers) may be reduced.

However, the net effect is that the tax relief will mean that on current industry estimates, consumers (particularly higher rate tax payers) could often benefit from taking out PTA rather than OTA in terms of premium. However, PTA may not be suitable in all cases because of limits imposed by tax legislation and because it cannot offer additional features such as critical illness cover, waiver of premium options and cover on a joint life basis. Most standalone PTA products will meet the criteria to be pure protection contracts. The changes proposed by FSA apply to standalone PTA that is a pure protection contract. Ordinary term assurance can be sold under ICOB and is one of the most common forms of life assurance that consumers take out, typically with a mortgage. The FSA proposes to allow firms to sell standalone PTA under COB rules and ICOB rules in order that PTA is more widely available to consumers. This is because most term assurance contracts are sold by advisers who are only qualified to sell under ICOB. For example, it is estimated that 54.5% of term assurance sales are made with a mortgage and most mortgage advisers are generally qualified to comply with MCOB and ICOB only. The FSA recognised the key changes and have proposed certain amendments to the rules surrounding this product. Historically it fell into the 'COB Sourcebook' (Conduct of Business) and was not in the ICOB (Insurance COB Sourcebook). However, there are proposals to include this contract in both.

Further details can be found on pages 34 to 39 of the FSA consultation paper on the change.

The risks associated with the sale of PTA compared to OTA include:

• The lump sum death benefit under PTA counts towards the overall lifetime allowance (set at £1.5m from A-Day, rising to £1.8m by 2010/2011). If this limit is exceeded the benefits payable beyond the limit are taxed at 55%.
• Tax relief on annual pension contributions (including PTA) will be limited to the higher of 100% of earnings or £215,000.
• Customers could mistakenly think that PTA would provide them with a pension.
• Clients may believe there is some form of 'pension' benefit at the end.
• Clients who have registered for 'enhanced protection' could be seriously disadvantaged if they actioned a PTA plan.
• The tax incentives may be exaggerated to the detriment of an excluded partner / spouse.
• HMRC / Gordon Brown may have another 'SIPP property change of mind'.
• IFAs are not fully aware of how the providers will see the opportunity and who will wish to be active in the market.
• Mortgage advisers (for example), may use this as an opportunity to re-broke large numbers of historic cases, especially for higher-rate taxpayers.
• Tax-relief may be changed
• Certain add-ons, such as critical illness cover, waiver of premium, joint life cover are unlikely to be available