There's no going back

17 August 2014

Rumours are abound that some of the life offices are contemplating the introduction of exit charges to frustrate individual members of Defined Contribution pension schemes from accessing their cash in order to take advantage of the more liberal tax regime, which exists following the changes introduced by the Chancellor at the last Budget. Canute comes to mind; the king who boldly commanded the tide to stop and not wet his feet. The tide of course ignored him.

We are now well beyond the period when life insurance companies rewarded distributors for the introduction of clients with the payment of commission. Typically the cost of this commission was amortised by the life insurance companies over a decade or two. The monies paid to the distributor would be charged against profit over the life of the pension scheme. Life insurers of course now expect the number of individuals insured under group pension plans to diminish rapidly and consequently face an accelerated write-off of these payments made to distributors. Many have already written off substantial amounts of embedded value. Some in the industry, in an attempt to avoid this hit, appear to be contemplating exit charges on those wishing to withdraw their savings. They argue, incredibly, that there is nothing to prohibit this action.  

No one taking a pensions policy with an insurance company could have imagined that when they got to the point of retirement, they would be charged a penalty for converting their savings into a pension. The charges now under contemplation are contrary to the purpose of the contract. While insurance companies may have the legal right to impose these charges, the reaction of clients is all too easy to anticipate. The Chancellor has decreed that individuals should decide how they best use their savings. An arbitrary charge from the insurers is only likely to further discredit an already tarnished reputation of our industry.  

The Chancellor’s Budget moves have proved immensely popular. The ability to be able to withdraw cash from a pension scheme over a period of time, at a pace dictated by the individual and in a manner which optimises the tax charge has, initial research suggests, greatly improved individuals attitude to saving for retirement. This is a wholly positive phenomenon. To now impose a charge on the withdrawal of cash is likely to reverse this changing attitude to long-term savings and prove wholly detrimental.  The new more flexible tax structure of course calls on the insurance industry to develop new products tailored to ensure that the range of possibilities open to individuals are supported by insurers’ contracts.  

We are potentially at a crossroads for the industry, hackneyed as this sounds. On one hand, life insurance companies can choose to seek to protect the value of their balance sheet with the short term expediency of imposing a levy on those wishing to cash in their savings. They must hope this does not precipitate the demise of their business and contribute to the decline of the industry.  On the other hand, they can seize the opportunity presented by a liberalised tax environment to develop new products designed to meet the evermore varied demands of consumers and to ensure that the full flexibility provided by the Chancellor’s ruling is facilitated by products which the industry provides. In this way the industry remains relevant and the industry’s participants have the potential to prosper.  

The former course rather than the latter should precipitate swift action from the Regulator. Charging people to access their money from a savings plan must be seen as malpractice and should be prohibited.  

contact Mark Wood
Chief Executive Officer Mark_Wood@jltgroup.com 020 7309 8331