Failure to respond to the forms, initiated by the Inland Revenue and attacked by the insurance companies as being baffling and incomprehensible, will mean that a pension is closed down.
Pension companies are required by law to make this check on certain policyholders every five years. Those affected are employed people who are contributing to their pensions. Policyholders whose only input to their pensions consists of rebates from National Insurance contributions, and the self-employed, are unaffected.
The check is being made so the Government can ensure it is not paying more tax relief on personal pensions than it needs to. Since personal pensions became available in July 1988, 5 million have been sold, many of which are due for their first five- yearly check.
People who have been incorrectly receiving tax relief on personal pensions will have their premiums refunded, according to Ron Spill, pensions consultant at Legal & General. The pension provider will also have to repay the Inland Revenue the tax relief it had claimed on the individual's behalf.
Many policyholders will need to seek advice from pension providers to complete the forms, if not from their employers and possibly accountants as well, although the most common reason for becoming ineligible for tax relief is likely to be having joined an employer's scheme since starting a personal pension.
Mr Spill said that unemployed people may also have become ineligible owing to a lack of taxable earnings. Those who have gone abroad to work are also likely to have become ineligible.
A small number of company directors may be affected, although the required circumstances are very precise, so expert advice ought to be sought. Indeed, the most perplexing part of the form relates to company directors, who are asked to verify that they are not 'in receipt of emoluments to which section 644 (6A) of the Income and Corporation Taxes Act 1988 applies'.
Legal & General, which has about 200,000 policyholders, is so worried that they will be unable to understand the forms, which the company started to send out this weekend, that it is offering a pen or a Legal & General umbrella to those who return them.
NPI (National Provident Institution) sent its first letters out at the beginning of July, and just over 40 per cent of policyholders responded within 10 days, a proportion that had increased to 60 per cent by last week. NPI said it would have to write to about a quarter of those who had responded, because their answers were ambiguous. It appeared that they had not understood the questions properly.
The Inland Revenue defended the forms, stating that they had been drawn up in conjunction with the Association of British Insurers (ABI). The ABI said it had asked for a change to the original draft, but was monitoring members' experiences to see whether it should protest again.
L & G policyholders who do not send back the forms by the beginning of June will receive reminder letters. The company will also try to contact them by telephone. If there is no response by 1 July, another letter will be sent and if there is still no response by 1 August, L & G will start the procedure necessary to stop collecting contributions and make the policy 'paid up'. Money paid into the pension so far will remain invested until retirement.
Other companies are preparing similar strategies to contact pension-plan holders. Norwich Union will send up to three letters to policyholders, although there are no free gifts on offer.
Prudential, which has 600,000 personal pension customers, says it only need contact a few thousand policyholders in the near future. Prudential agents have been in regular contact with most plan-holders in the past few years and have asked them to complete the forms before their fifth anniversary to avoid a rush.
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