ABI response to the Consultation on the abolition of 36 reliefs Consultation Document
recommendation to
ABOLISH LIFE ASSURANCE PREMIUM RELIEF
EXECUTIVE SUMMARY
The ABI fully supports the Government’s objective to simplify the tax system. The Office of
Tax Simplification (OTS) recommended that Life Assurance Premium Relief (LAPR) “be
abolished; however there should be consultation with the insurance industry to confirm our
understanding.”1 After reviewing the evidence presented by the OTS and the Government
consultation document, we can confirm that the assumptions underlying the decision to
abolish LAPR were incorrect and based on incomplete information. Furthermore, abolishing
LAPR will not result in simplification. It will in fact, add to the administrative burden for
insurers and cause confusion for policyholders.
We therefore, believe that LAPR should continue and be left to naturally run off as:
1. There is very little administrative burden to insurers of operating the relief, and it will
cost the insurance industry several million pounds to change systems and advise
policyholders if LAPR is abolished;
2. The policy rationale remains valid for policies taken out prior to 1984;
3. It will not result in a more flexible and simple savings system – due to the nature of
the products that attract LAPR, many policyholders will not be able to change to
equivalent alternative products. For the policyholder, policies attracting LAPR are
simple tax efficient methods of both saving and obtaining life insurance;
4. Its removal will disadvantage policyholders who purchased these products in good
faith;
5. There are a number of multiple policies in existence, coupled with some large
policies, which means that the relief is worth considerably more to some
policyholders than the average figures quoted in the OTS report;
6. The impact on policyholders will be disproportionate to the benefit to Government of
removing the tax relief. The majority of policyholders are elderly, and less likely to be
able to understand and deal with the changes, or to afford the financial loss they will
suffer as a result of the loss of tax relief.
1
Review of Tax Reliefs: Final Report Office of Tax Simplification, M. 37.
1.
INTRODUCTION
The ABI2 fully supports the Government’s objective to simplify the tax system. However,
abolishing Life Assurance Premium Relief (LAPR) will not result in simplification and will in
fact, add to the administrative burden for insurers and cause confusion for consumers.
LAPR is a relief that is available for eligible long term policies. It was introduced to
incentivise long term savings and to encourage people to provide financial protection for
their families. Relief is available to the policyholder at 12.5% of the premium, up to a
maximum premium of £1,500 per annum or one sixth of the individual’s total income for the
tax year – whichever is greater. The policyholder pays the premium net of the relief and the
insurance company reclaims this amount directly from HMRC.
The relief was abolished in March 1984. The Government of the day decided to grandfather
the relief for existing policies, but allow no new policies. Consequently the number of eligible
policies is reducing and will eventually disappear of its own volition. However, there are still
a large number of eligible policies and the relief continues to be frequently used, particularly
by elderly savers for whom it is sometimes their only or main source of savings.
In Budget 2011 it was announced that LAPR will be abolished after 2012 in a future Finance
Bill or other legislative vehicle, with a final date set out after the consultation. The Budget
announcement followed a report from Office of Tax Simplification (OTS) on Tax Reliefs. In
that report it was recommended that LAPR “be abolished; however there should be
consultation with the insurance industry to confirm our understanding.”3 The final
recommendation was based on their conclusion that the savings for each policyholder is
negligible, and that this relief is burdensome for the insurer.
The Government has now released the consultation document Consultation on the abolition
of 36 tax reliefs which confirms the abolition of LAPR in Finance Bill 2012, with an effective
abolition date from 6 April 2014. The document stated that the rationale for abolishing the
relief was as follows
1. The Government wants more flexibility and simplicity in the savings system;
2. The length and complexity of the legislation compared with the small average amount
of tax relief per policy; and
3. The administration burden placed on insurers.
After reviewing the evidence presented by the OTS and the Government consultation
document, we can confirm that these assumptions underlying the decision to abolish LAPR
were incorrect and based on incomplete information.
Furthermore, there is a
disproportionately high cost to insurers of abolishing the relief.
2
The ABI is the voice of insurance, representing the general insurance, investment and long-term savings industry. It was
formed in 1985 to represent the whole of the industry and today has over 300 members, accounting for some 90% of premiums
in the UK. The UK insurance industry is the third largest in the world and the largest in Europe. It is a vital part of the UK
economy, managing investments amounting to 24% of the UK’s total net worth and contributing the fourth highest corporation
tax of any sector. Employing over 275,000 people in the UK alone, the insurance industry is also one of this country’s major
exporters, with a fifth of its net premium income coming from overseas business.
3
Review of Tax Reliefs: Final Report Office of Tax Simplification, M. 37.
Therefore, the rationale for abolishing LAPR is not sound and LAPR should not be
abolished. Instead, it should be left to naturally run off, as per the intention of the 1984
Government.
In light of this, we have prepared the following report, which addresses the key questions
asked by the OTS and the consultation document, and outlines the impact of abolition on the
insurance sector and policyholders.
2.
RATIONALE FOR RETAINING RELIEF
2.1
Is the policy rationale still valid?
The “Government asked the OTS to identify those reliefs whose policy rationale is no longer
relevant, or which created unnecessary complications”4. As outlined in the OTS report,
LAPR was introduced in 1799 with the intention of encouraging people to make financial
provision against death, so as to protect their families. Many policies therefore provide
family members with a provision to cover burial costs. LAPR also used to encourage saving
for retirement or a rainy day.
In 1984 the decision was made that LAPR would cease to apply to new policies. The 1984
Budget speech explains the reasons for this:
The main effect of life assurance premium relief today is unduly to favour
institutional rather than direct investment. It has also spawned a multiplicity
of well-advertised tax management schemes and no fewer than 50 pages of
legislation attempting to deal with its abuse. I therefore propose to withdraw
the relief on all new contracts made after today. I stress that this change will
apply only to new, or newly enhanced, policies, taken out after today.
Existing policies will not be affected at all.
For existing policies the Government decision to retain it, acknowledged that these policies
were taken out as a long term savings plan on the assumption that they will be able to get
the tax relief. Therefore, for the lifetime of these policies LAPR would continue.
The OTS report was silent on the continuing validity of the policy rationale for the
grandfathering of existing policies. Between 1984 and now, customer expectations have not
changed to alter the position taken by the Government. Government estimates (which we
concur with) show that around 1.5 million policies are still in existence. Policyholders took
out these policies under the assumption and financial calculation that for the lifetime of their
policy, they were investing in a tax efficient savings or funeral plan. Therefore the policy
rationale for retaining the grandfathered relief is still valid and its removal would undermine
the basis on which people were encouraged to provide for themselves through saving,
including some longer term mortgage endowment arrangements which remain in force.
4
Condoc para 1.2
2.2
A more flexible and simple savings system
We support the Government’s objective to simplify the savings system. However, abolishing
this grandfathered relief does not accord with this objective. As explained in section 3.1
policyholders will not always have the flexibility to surrender these policies and transfer the
value into another savings vehicle.
Furthermore for the policyholder there is no
administrative burden in claiming the relief – they do not need to complete annual forms or
submit tax returns to HMRC. It is therefore a very simple tax effective savings vehicle for
them. Removing it, will also not simplify matters for the policyholders for the reasons
outlined in section 3.1.
2.3
Length and complexity of legislation compared to the small average amount of
tax relief per policy
While the legislation may seem complex to the uninitiated, this legislation has remained
relatively untouched since 19895. Therefore, it is embedded into systems and is well
understood by insurance tax professionals and HMRC, who are its only users.
HMRC has now confirmed that the total tax relief for 2010/11 was £13.7 million down 24%
from the £18 million estimate. These figures are consistent with our data. Our evidence
shows that the estimated tax saving for each policyholder of £14 per annum, understates the
wide range and distribution of relief actually received. It also overlooks the impact its
removal would have on individuals, particularly as some individuals will tend to have more
than one policy, thus increasing the value of their tax relief.
For one company 7% of eligible policyholders are in this position. The majority have two
plans, but there are hundreds of customers with greater numbers of plans. For example, we
are aware of an elderly policyholder with four plans. LAPR to this person is worth £358.76
per annum. Some policyholders have up to 20 active plans in place, all attracting LAPR.
Therefore, the removal of LAPR for these policyholders will have a significant negative
impact.
For industrial branch6 business the average figure per policy is likely to be less than £14, but
this only serves to underline that the industry costs of removal, are disproportionate to the
tax saved by Government.
Therefore, the conclusion that the savings for each policyholder is negligible is inconsistent
with industry information.
2.4
Complexity, compliance and administrative burden of operating the system
The OTS was correct to say that for the policyholder there is no administrative burden in
claiming the relief. The relief is claimed by the insurance company and is reflected in the
amount paid by the policyholder. Furthermore, we share the view that there is little
5
This was when the rate of LAPR was reduced to 12.5%.
Policies that attract LAPR can be categorised into two categories – industrial branch (IB) and the ordinary branch (OB). IB
policies refer to “policies where a small amount was collected from policyholders on a regular basis, often by someone calling
at their home. These policies generally have a small value and were taken out to cover the cost of burial. OB policies
generally refer to all other policies.
6
administrative burden for HMRC. HMRC audits are now extremely rare, as the claims are
relatively easy to monitor.
However we disagree with the assumption for insurers, first postulated by the OTS and then
again expressed as one of the rationales for abolishing the relief in the Government
consultation document, of the complexity of the system up keep required to facilitate these
policies and the relief.
Given the age of these policies, the systems are stable and run with minimal maintenance.
LAPR reclaims are highly automated and integrated within normal systems. As there are no
new policyholders, manual variations are only required in exceptional situations, e.g. an
assignment of the policy or when the policy holder becomes non-resident. This combined
with the fact that these are legacy policies means that there is very little staff training
required and there has been no significant change to procedure manuals since the change
in rate in 1989. It would be more costly to make changes and updates to the systems than
to allow them to continue running on the existing basis of LAPR.
As one of the main reasons for recommending abolishing the relief, was the compliance and
administrative burden of the system for insurers, we would therefore recommend that the
relief be retained.
3.
IMPACT OF REPEAL
As a policy contract will generally show the gross premium as the amount payable,
contractual premiums will not increase if LAPR is repealed. Instead the policyholder will be
impacted in one of three ways:
1. The policyholder could be charged more to make up for the loss of tax relief, i.e. the
amount of the gross premium, to receive the same benefit.
2. The level of benefits could be reduced to a level commensurate with the policyholder
continuing to pay the same (net) level of premium.
3. The policyholder might choose to stop paying premiums in which case the policy will
either be made “paid up” with a small benefit payable on death, or will lapse with a
complete loss of financial cover for the family concerned.
Reducing the level of life cover will not always be an option available to policyholders.
Policies set up before 1984 tend not to be unit linked making a contractual alteration like this
a significant piece of work and a cost for insurers. No IB policies are unit linked and in the
past the preferred method to alter an IB policy was to replace it with a similar policy. Our
members no longer sell these equivalent policies, so this area would need to be explored
further with our members if LAPR is repealed.
3.1
Impact on policy holder
Depending on the individual circumstances of the policy contract, the policyholder will either
be forced to pay more for their policy or accept a lower benefit. Where a policy benefit is
reduced because the policyholder cannot or chooses not to pay the increased premium
arising from the removal of LAPR, this could, in some instances, impact on the qualifying
status of the policy. This will then give rise to unexpected tax consequences on the
policyholder or his/her estate at the time benefits are paid, should a chargeable gain arise.
Those who cannot afford to pay more, or cannot reduce the level of benefit, will either have
to surrender their policies or make them paid up. However, some policies may have little or
no surrender value and therefore the policy may be forfeited. Either way, they will be worse
off than they are now. Repeal of LAPR will therefore cause detriment to these policyholders
who took out these policies with the expectation that they would receive tax relief on the
premiums.
Given the age of these policies, most policyholders, particularly those with IB policies, will be
elderly and retired. Our data shows that approximately 80% of all policyholders will either be
at retirement age or nearing it in the next five years. They will generally, have lower than
average income and lower levels of overall savings. They are the sector of society most in
need in this particularly tough economic climate. The impact of withdrawing the relief (and
the consequent lapsing or reduction in benefits) may therefore have a disproportionate
impact upon their finances. Many policyholders saw the benefit of LAPR as increased
benefits, rather than a premium discount. They therefore, rely on and expect this tax relief.
Some will struggle to assess the impacts of the changes and which option would be the best
for them, but will not be able to afford financial advice. This will mean that some will not
arrive at the right decision. We are also concerned about the impact on age allowance for
more elderly policyholders who may see this benefit reduced by chargeable gains arising on
a policy that becomes non-qualifying.
Much of the burden of abolishing this relief will therefore fall on some of the most vulnerable
of society who will be less able to meet an increase in cost.
3.2
Impact on insurers
Abolishing LAPR will have a major effect on insurers systems and work load. The work
involved will include:
Meeting “treating customers fairly” (TCF) obligations
The insurer will need to take all necessary steps available to communicate to their
customers the situation and how this impacts them. This will involve mailing
customers and the associated follow on telephone support and letters. Given the
age of some of these customers, some will struggle with understanding the
implication of the withdrawal of LAPR on their financial position. Furthermore,
insurers may not have up to date contact information for all customers, resulting in
some facing a reduction in benefit or increase in premiums without a personalised
explanation. This is because often details are only updated when a claim is put in.
System changes and calculations
Policies attracting LAPR do not generally operate on a different system. Instead they
are integrated with other policies. Therefore, it is simply not a case of “turning off”
the system and transferring polices. Significant system changes will be required.
This will involve removing LAPR flags and deleting the automated claim reporting
system, calculating the new cash value premiums or adjusting benefits. For many IB
policies, the changes required will be different because LAPR took the form of
enhanced policy benefits instead of a reduced premium.
Collection changes
Many collections are made via standing order or direct debit. There is a significant
amount of cost and work involved in changing these with the bank and receiving
policyholder approval where needed. Standing Order payments require customers to
make the changes and typically ABI members have found from experience a
significant degree of apathy to making such changes. If we continue to receive an
incorrect premium this would affect the cover given. An outstanding premium would
affect the maturity/death value of the policy. The additional implication of the
qualifying status has already been noted in the document.
Systems will not register a premium as being paid at all if an incorrect premium is
received. Corresponding with policyholders will be costly and if the policyholder does
not make the required changes this will result in accounting issues. This will affect
the Companies need for clear and transparent auditing requirements.
Some of the cost (all of the costs for mutual funds) of communication and system change will
be passed on to policyholders, further reducing benefits.
In short, the abolition of LAPR is certain to be more costly than its continuation.
3.3
Cost of Abolition
The cost of abolition varies from company to company, dependant on the number of eligible
policyholders and system integration. As an average, we estimate that the cost for each
company is between £100,000 – £200,000. For the industry as a whole, this equates to
several million pounds. This includes system changes as well as communication to
customers. Much of these costs are fixed and not directly proportional to the number of
policyholders, so again the averages hide the true distributional impacts. For many
companies the cost of abolition is disproportionate to the value of the tax relief. For
example, the value of the tax relief for one of our members for 2010/11 is £30,000.
Furthermore, this additional call on system change resources and cost comes at a time
when resources are already stretched with Solvency II, pension legislation changes, the US
FATCA rules and the Retail Distribution Review.
For companies that outsource these policies this cost could be considerably higher as
contractors generally charge a premium for changing agreements etc.
3.4
Legislative impact
One of the major benefits of repealing the legislation is said to be the removal of legislation
from the statute books. However, due to the degree of integration with the chargeable event
legislation, we believe that abolishing LAPR will require additional legislation.
In addition to the considerable number of consequential changes that will be needed,
additional legislation may be required to ensure that any reductions in benefit resulting from
loss of LAPR should be ignored in determining the qualifying status of a policy where there
has been a previous variation or substitution in the policy.
4.
GOING FORWARD
When the decision was made to abolish LAPR for new policies, there were many 25 year
endowment policies taken out. With the expiry of the 25 year anniversary of abolishing
LAPR and the maturity of most endowment policies, there has (in the last two tax years)
been a significant decline in the number of policies still attracting LAPR. Our data now
shows a steady run off, with one company stating that their last policy will expire in 2037. By
2025, however the majority will have gone.
However, a significant proportion of policies are “whole of life” policies. Premiums paid
under these policies will continue until the death of the policyholder. This means that we
cannot predict when these policies will run-off. Our data shows that approximately 70% of
all policies are whole of life policies. Actuarially given the age profile of the majority of
policyholders, many will reach their natural conclusion in the next 20 years or so. However,
given the younger age of some of the policyholders (e.g. we are aware of some that are in
their 30s) these policies could conceivably run for another 70 years. In light of this it is
impossible, at this stage, to have a complete picture of when policies attracting LAPR will
reach an acceptable level where it would become cost effective to repeal the legislation.
Therefore the most cost effective and less disruptive option is to maintain the current
position and allow the policies to run-off naturally. As systems are integrated, this option will
have no additional cost to insurers, and will leave the consumer position untouched.
Repealing the grandfathering of existing policies will result in a substantial cost to the
insurance sector and will leave consumers less well off with very little benefit to the
Exchequer.