Personal pension term assurance was life cover paid for from pension contributions. Tax relief on new policies ended in 2007, but some older ones kept it.
If you hold one, or have found the name on an old statement, the useful question is whether yours is a "protected" policy, because that decides whether tax relief on the premiums still applies. Policy papers from 2006 or 2007 are easy to mislay. An FCA-authorised adviser will, for nothing, help you settle what to put to your insurer; the form on this page, completed in a minute, brings that phone call.
What is personal pension term assurance?
Personal pension term assurance (often shortened to PPTA) is a life insurance policy that pays out if you die within a set term, with the premiums paid out of contributions to your personal pension rather than from your bank account. HMRC's Pensions Tax Manual calls this personal term assurance and, in the tax legislation, a non-group life policy: a policy under which the only benefits that can be paid are payable in consequence, or in anticipation, of death. A policy that pays out on the death of only one person counts, however many people it covers.
The attraction was tax relief. Money paid into a pension normally gets relief, and for years that included the part used to pay for life cover. That route has been closed for new policies since 2007, which is why the product is now mostly a legacy matter. If you are weighing up how pension tax relief works today, pension tax relief explained covers it.
Does personal pension term assurance still qualify for tax relief?
Not on new policies. HMRC's Pensions Tax Manual says contributions paid to a registered pension scheme after 5 April 2007 (after 31 July 2007 for occupational pension schemes) that are life assurance premium contributions are not relievable pension contributions and cannot qualify for tax relief. Schedule 18 to the Finance Act 2007 carries the protected-policy exceptions.
The rule catches contributions that pay the premiums or are meant to go towards them, and if those fall short of the premiums in a tax year, other member contributions are treated as premiums up to the shortfall. Contributions made before 6 April 2007 (before 1 August 2007 for an occupational scheme) cannot be life assurance premium contributions, so they could still qualify.
Employers are treated differently. The manual says relief for contributions paid by an employer in respect of a non-group life policy is not affected by these restrictions.
Which older policies kept their tax relief?
Some policies are "protected policies", and the manual says premiums paid to these may still receive tax relief. For a policy held for a registered pension scheme that is not an occupational scheme, which covers an individual personal pension, the manual sets out these conditions.
- A policy is protected if it was issued in respect of insurances made and held for the purposes of a registered pension scheme before 6 December 2006 (unless it has since been varied, as described below).
- One made on or after 6 December 2006 can still be protected, but only if the insurance was made and became held for the pension scheme before 1 August 2007, the benefits and the period they are payable for are no greater than in the application, and the insurer received the application before the relevant cut-off.
- That cut-off is 13 April 2007 if, on the day the insurance was made, the person also had an actual or prospective entitlement to a pension under the same scheme, and 14 December 2006 in any other case.
For policies held under occupational pension schemes the dates are different: before 21 March 2007, or after 20 March but before 1 August 2007 where the insurer received the application before 29 March 2007 and the amount and term of the benefits are no greater than applied for. Which category a particular policy falls into depends on how it was set up, so the paperwork matters more than the name on the policy.
A lapsed policy reinstated before 1 August 2007 could still count as protected, but only if it was reinstated on the same terms without a new proposal and the lapsed policy had itself been protected.
What makes a protected policy lose its protection?
This is where existing policyholders most often get caught out. Per the manual, a change to the terms that increases the benefits payable, or extends the period over which they are payable, causes the policy to lose its protected status, and tax relief on the premiums stops after the change. If protection is lost part way through a tax year, the restriction only applies to contributions paid after the date it was lost.
The manual draws some fine lines.
- A rise that happens under a built-in option, for example cover set as a percentage of earnings or rising in line with inflation, where the insurer cannot refuse, is not a variation. Where the insurer has the right to refuse to increase cover on the same underwriting terms, an increase is a variation and triggers loss of protection.
- If the policy allows a contribution holiday while cover of the same level and term stays in place, restarting contributions does not trigger loss of protected status.
- If you take over paying the premiums from your employer, the policy keeps its protection as long as no other change increases the amount or term of the cover.
- Replacing a protected policy with another policy creates a new policy that is not protected. The manual gives the example of one insurer taking over another and moving legacy policies onto its own product, even on the same terms.
- When a protected policy lapses, for whatever reason, this will normally trigger loss of protected status, which cannot be restored if the policy is later reinstated.
The manual says that if you are uncertain about a particular policy, ask the insurance company that provides it. That is the route for questions such as whether a change you are offered counts as a variation.
How does it differ from ordinary term life insurance and death-in-service?
The cover itself, a set term that pays out on death, is the same idea as ordinary term life insurance. The difference was how the premiums were funded: through pension contributions and the tax treatment that went with them, not from your own spending money.
Death-in-service is something else again: a benefit through an employer's scheme. Discussing extra death-in-service cover bought through additional contributions, the manual says cover provided on a group basis is not a non-group life policy, so relief continues. How it works, and what it pays, is in what happens to your workplace pension when you die.
Who receives what is left in a personal pension depends on the scheme and your nominations; how pension death benefits work sets out the options, who can be named as a pension beneficiary covers the choice, and filling in an expression of wish form covers the paperwork.
If you already have one: what to check
Start with the policy documents and the provider, since the position depends on dates and terms that only they hold. Useful questions: when the application was received, whether the policy was made and held within the pension scheme before the cut-off dates above, whether cover or term has ever been increased or extended, and whether a transfer of the pension or a provider takeover has ever changed the policy.
If you are also thinking about moving the pension itself, how to transfer a pension covers the steps; check first what would happen to any linked life cover, because a replacement policy would not be protected. Whether to keep, replace or end a policy, and what cover you would then want, depends on your health, your dependants and the rest of your arrangements. Anyone wanting to go through it by phone can leave their number on the form here, and a phone call from an adviser holding FCA authorisation follows, free.
Questions people ask about personal pension life cover
Is it possible to start personal pension term assurance today?
Premiums paid from a pension for a policy taken out now would not get tax relief, because the restriction applies to contributions after 5 April 2007 to schemes that are not occupational schemes.
Do I pay tax on the premiums of a protected policy?
The manual says premiums to a protected policy may receive tax relief, which means they are treated like other relievable pension contributions. How much that relief is worth to you still depends on your own income and tax position.
Who gets the payout, and is it taxed?
That depends on the policy terms and who is entitled to the money. Tax on a payout turns on how the policy is held and who gets it; an FCA-authorised adviser, reached free via this page's form, will explain how payouts like yours are treated. For the pension fund itself, see pensions and inheritance tax.