Budget '97: Over-60s may be forced to cancel medical policies

Budget and you: INSURANCE

The Chancellor yesterday announced the abolition of tax relief on private medical insurance policies for the over-60s. The move could lead to thousands of the 550,000 older people currently benefiting from the tax perk cancelling their policies and many of the remainder facing higher premiums.

For those that retain their policies, the abolition could lead to premiums rising by as much as 33 per cent, which could easily translate into hundreds of pounds more a year. But many insurers, while condemning the removal of tax relief, said they would look to mitigate it by offering lower-cost policy options.

The move was expected and was one of the few specific tax commitments of the Government in its election manifesto. The abolition hits existing as well as new policies, although existing annual policies that are paid for annually will continue to effectively benefit from tax relief until they are renewed.

The Chancellor said the abolition would mean more than pounds 100m of extra money available a year which would be used to help a wider section of the sick and elderly. The Inland Revenue said there was little evidence that the tax relief - which has been available since 1990 - had led to any significant increase in the purchase of medical policies.

But the Association of British Insurers said the stripping of tax relief would be counterproductive. Many policyholders would cancel their policies, leading to lesser savings than envisaged by the Government, and in turn increasing the burden on the health service.

The Government is allowing some tax concessions for policies already in place, but even these policies will lose tax relief by 30 July 1998. One insurer, Western Provident Association, described the removal of tax relief as like "sending the elderly up the river and then removing their paddle". Its research suggested more than one-third of policyholders would cancel their policies.

But some of the biggest insurers immediately made announcements that they would be looking to help their policyholders mitigate the loss of tax relief. Tim Baker, commercial director at Norwich Union Healthcare, said: "We have a number of options in place for our customers and we believe that 98 per cent of our customers will not need to pay more." Both Bupa and Norwich Union have set up helplines for their policyholders.

Separately, the Chancellor yesterday extended insurance premium tax to other long-term healthcare policies that had previously escaped the tax, in a move which could translate into a 4 per cent increase in premiums.