Aviva remains adamant that the product has not only received the HMRC seal of approval but the legislation surrounding it was examined and confirmed by Queen’s Council. But this is still not enough to quell some advisers’ concerns.
The relevant life market is currently small at around just over 20,000 policies, according to Mr Wheatcroft, but growing as a result of the decrease in the Lifetime Allowance from £1.8m in 2005 to £1m this year.
The product is, in effect, a single person version of an Excepted group life plan, which allows for tax relief on premiums and is held in a discretionary trust so it doesn’t impact on an individual’s Lifetime Allowance (LTA).
However, the increasing shift to excepted group life plans for this reason comes with its own complications, according to Paul Avis, marketing director of Canada Life Group Insurance, who says that they should only be used selectively and only where legal and tax advice is sought by the individual as everyone’s pension situation is different.
Mr Avis adds: “The lower LTA brings with it other potential implications for the protection industry which are not being routinely considered, such as employees asking for their pension contributions to be paid as salary to avoid breaching the LTA. This has a knock-on effect on an employer’s group life and group income protection arrangements.”
The key sticking point with Aviva’s initiative is that in order to benefit from the tax exemptions associated with the relevant life plan, the critical illness conditions covered must be linked to the retirement of the individual. This is set out in Section 307 of the Income Tax (Earnings & Pensions) Act 2003: ‘payment must be made on, or in anticipation of, retirement.’
This begs the question: how do you ascertain which conditions will trigger retirement? The answer to which is somewhat unclear.
Mr Wheatcroft adds: “I can understand how Aviva came to the conclusion that they could add CI to relevant life. However, the concern remains that low severity conditions could fall foul of the legislation.”
This is making some advisers feel uneasy about recommending the product to clients.
Alan Lakey, director at CIExpert Ltd, comments: “Many advisers and networks are reluctant to recommend Aviva’s plan for fear of future complaints and because the FOS will likely consider the matter to be one of advice and not product design.”
Meanwhile, Paul White, senior consultant at Punter Southall Health & Protection, warns caution against using tax incentives to encourage employers to introduce benefits at a time when the government is looking to review incentives already in place – think salary sacrifice and pension reform.
