These policyholders could face hardship in retirement, unless they realise what has happened and take steps to reactivate their pensions or make other arrangements.
Pensions legislation requires that certain personal pension policyholders formally confirm every five years that they are still eligible to have a policy and to receive the valuable tax relief on contributions. Those affected are the millions of people making their own contributions over and above rebates from National Insurance.
Personal pensions were introduced in July 1988, so fifth anniversaries started to come up this July. About 5 million people have personal pensions - though not all make their own contributions - and insurance companies have been running expensive programmes to contact policyholders.
They are being sent Inland Revenue-prescribed forms that ask a series of questions to establish whether they are still eligible to have a scheme.
The main reasons for someone to become ineligible are that they have become unemployed or have joined an employer's scheme.
People who do not respond to these forms within 30 days of the anniversary will have their pensions closed down. The policies will be made 'paid up', which means no further premiums will be collected. The policyholder will be able to draw a pension based on the amount accumulated to date, but the benefits would probably be small. Expenses continue to be collected from paid-up policies and this erodes their value.
Individuals can reactivate paid-up policies in future, although there may be extra upfront expenses to pay.
Policyholders who do respond to the forms and reveal that they are no longer eligible to have a personal pension will also have their policies made paid up. They may also lose tax relief credited to their policies since the date they became ineligible. Premiums paid during this period are returned.
Five of Britain's largest pension providers have already shut down more than 1,000 policies and are awaiting replies from hundreds more.
Prudential, with 600,000 policyholders, said it was trying to avoid this by offering switches into additional voluntary contribution schemes or by soaking up unused tax relief entitlements through the 'carry back, carry forward' rules. Prudential has made 733 policies paid up since July. Steve Bee, pensions manager, said this seemed a large number but was hardly more than 0.1 per cent of its policies. A further 659 people have confirmed they are ineligible.
Legal & General, which has 425,000 policyholders, claims a low fall-out rate with 132 policies having been made paid up because the individuals have not responded and 172 becoming ineligible. However, L&G has been encouraging people to reply to its letters by offering free gifts - either a pen or an L&G umbrella. The company is also awaiting replies from 320 people. Peter Timberlake, marketing manager, said L&G was pleased with the response: 'We thought up to 30 to 40 per cent of business would come off the books.'
Standard Life, with more than 500,000 policies, has made 134 paid up. A further 420 have proved to be ineligible and the insurer is waiting to hear from more than 470.
Allied Dunbar, with 460,000 policies on its books, could only provide figures for people whose policies had their fifth anniversaries in July and August. Of these, 67 have been made paid up and 46 were ineligible.
Norwich Union expects to have written to 9,000 policyholders by the end of this year. Among those contacted so far, 3 per cent are failing to respond, suggesting a fall-out figure of 270 by the end of December.
People who are ineligible for their personal pensions are in a less parlous position than those who have simply failed to respond to insurers' letters. Individuals in this second group, many of whom have probably changed address and failed to notify the insurer, will only realise something is amiss if they keep a close eye on their bank accounts and notice that premiums are no longer being deducted.
Meanwhile, individuals who are ineligible may have moved on to company schemes. Mr Bee at Prudential also said that in many cases, arrangements could be made for them to avoid losing out on premiums and tax relief. Policyholders may be able to mop up unused contribution allowances through the carry-back and carry-forward regulations to make these contributions. 'Many people don't realise that you can effectively keep a personal pension going for two years after joining a company scheme,' he said.
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