The Association of British Insurers (ABI) has published a statement1 setting out guidance on good practice for providers of cluster policies, with a particular focus on withdrawals.
A cluster policy is a product offering the policyholder the ability to split an investment (typically a single premium investment bond) equally between a number of identical life insurance policies or “segments”. The policyholder may withdraw a sum of money from a cluster policy, by way of either a full or part surrender of the policies within the cluster, or a combination of both (i.e. a full surrender of one or more policies and a part surrender of one or more others). However, the tax consequences of such steps can vary significantly, depending upon the chosen method for withdrawal. Once a withdrawal has been validly completed, the tax consequences cannot be reversed.
In a number of cases, policyholders have been faced with significant tax bills which could have been avoided if the policyholder had withdrawn their investment differently (see for example Joost Lobler v HMRC2 in which the first tier tribunal dismissed the policyholder’s challenge to the tax consequences of the surrender, in spite of the tribunal finding this was ‘outrageously unfair’, a decision which the policyholder only managed to overturn on appeal on the particular facts of that case because he had been acting under a mistake when requesting the partial surrender of his policies).
The ABI statement deals in particular with matters including:
- The tax consequences of withdrawing a specific sum from a cluster policy, by reference to examples.
- The point at which a surrender or part surrender becomes irrevocable.
- The extent to which a provider should intervene to ensure that a policyholder contemplating a surrender or part surrender is properly informed of the consequences. The ABI advice is that providers should either intervene in every case, or have risk assessment processes in place to ensure intervention where appropriate.
- The nature and timing of a provider’s intervention.
- The training and procedures that providers should put in place to ensure appropriate interventions are made.
- The possible scope for a default approach to apply in limited circumstances (such as where an urgent request is made and the provider is unable to contact the policyholder).
The matters dealt with in the ABI statement illustrate that providers of cluster policies should pay particular attention to the advice and information which they give to their policyholders and should also consider carefully whether in any particular set of circumstances it is appropriate to recommend that the policyholder seek independent financial advice.