Pension term assurance: the closed tax-relieved life cover

Pension term assurance was a form of life insurance with one big difference from an ordinary policy: the premiums were paid into a pension arrangement, so they qualified for pension tax relief. That made the cover cheaper for a basic rate taxpayer than the same amount of ordinary term life insurance, and cheaper still for higher rate taxpayers who claimed the extra relief. The product is closed to new policies, so nobody can buy one today, but policies taken out while it was available continue to run on their original terms.

In every other respect it behaves like term life insurance: it covers a fixed number of years, you pay premiums until the end of the term, and it pays out only if you die within it¹. If you pass away during the term, your loved ones receive a cash lump sum from the insurer¹. The policy has no cash-in value, so if you survive to the end of the term nothing is paid out and nothing is refunded¹.

If you hold one of these policies, the things that matter now are that the tax relief continues, that missing a premium can end the cover with nothing back, and that the payout and the protection around the policy follow rules this page sets out. It also covers how the inheritance tax treatment of pensions is changing from April 2027, which matters to anyone whose financial plans were built around the old rules.

Pension term assurance is closed to new policies

No new pension term assurance policies can be taken out. The product depended on life insurance premiums qualifying for pension tax relief, and the rules that allowed that were withdrawn, which closed the market. The closure means that anyone who wants this kind of cover today cannot have it, and anyone who sees it offered should treat the offer with great caution, because the product no longer exists in the market it was designed for.

A closed product is not the same as a dead one, and other closed schemes show how this works in practice. The Armed Forces Pension Scheme 05 closed to new members on 31 March 2015, when it was replaced by AFPS 15, yet members who joined before that date keep the benefits they built up⁵. The Financial Assistance Scheme similarly does not take on any new members, but it continues to pay the people it already protects⁶. Pension term assurance works the same way from the insurer's side: policies already in force continue, premiums continue to be collected, and claims continue to be paid on the terms written into the policy.

For a consumer this raises two practical points. First, if you already hold a policy, nothing about the closure forces you to give it up, and the tax relief that made the product attractive continues to apply to your premiums. Second, if you do not hold one and want life cover, the product that does the same job of paying a lump sum if you die within a set term is ordinary term life insurance, whose premiums do not attract pension tax relief. The rest of this page is written for existing policyholders, but the mechanics of the cover, the claim process and the protection rules will also be useful to anyone comparing it with today's alternatives.

How pension term assurance works: a lump sum on death or terminal illness

Pension term assurance is built on the same structure as any term insurance policy. Term insurance covers you for a fixed number of years, called the term; you pay premiums until the end of the term, and the policy pays out only if you die within it⁷. If you pass away during the term, your loved ones receive a cash lump sum from the insurer¹. Nothing is paid if you outlive the term, because the policy is insurance against dying early rather than an investment.

Most policies of this type also include terminal illness cover, which brings the payout forward. Under the provider's terms the benefit is available on death or on diagnosis of a terminal illness, typically where you are not expected to survive more than 12 months, and it is included at no added cost. The provider's own documents disagree on one detail of the maximum age at which the policy could be taken out, giving both 73 and 74, so if the entry age matters to your circumstances you would need to check the individual policy document. Terminal illness cover is not always available in the last 12 to 18 months of the policy, because at that point death within the term is close to certain and the cover is not doing the job it was priced for.

The payout is a single lump sum, not an income, and it goes to whoever the policy is set up to benefit. How that is arranged, in particular whether the policy is written in trust, determines who receives the money and whether it forms part of your estate. The dedicated page on terminal illness payouts covers how these claims work in more detail.

Tax relief on premiums for existing policyholders

The defining feature of this product is that premiums counted as pension contributions and so attracted pension tax relief. The relief works the same way as relief on any personal pension. Most providers claim tax relief automatically at a fixed rate of 20%, so the relief on that share is applied without you doing anything². If you pay Income Tax at a higher rate than 20%, you need to claim the extra tax relief yourself, which you do through HMRC, normally on a Self Assessment tax return². The same principle is set out for stakeholder pensions: if you pay tax at the 40 per cent or 50 per cent rate you can claim the extra tax back⁸.

The relief is bounded by the pension rules, not the insurance rules. You get tax relief on contributions of up to 100 per cent of your earnings each year, depending on the annual allowance⁸, and you usually get tax relief on money you pay into a pension⁹. For a policyholder still paying premiums, that means the relief continues as long as the premiums stay within those limits and you have earnings or other basis for relief. If your circumstances change, for example you stop working or your earnings fall, the relief position can change too, and it is worth checking with HMRC rather than assuming the automatic 20% continues to be correct.

Two further points complete the tax picture. First, life insurance and most other long term insurance are exempt from Insurance Premium Tax¹⁰, so the premium itself is not carrying a hidden insurance tax on top. Second, the scale of pension tax relief shows why the product was attractive while it existed: Income Tax relief on registered pension schemes covers relief on contributions, relief on investment returns and tax paid in retirement, net of the 25% tax-free lump sum¹¹. In the 2022 to 2023 tax year, 68% of Income Tax relief on total pension contributions was relieved on contributions to personal or private sector occupational schemes¹¹, and 54% was relieved on contributions to defined contribution schemes¹¹. More recent statistics for the 2023 to 2024 tax year again show 68% of relief on contributions going to personal or private sector occupational schemes¹². Pension term assurance premiums sat inside that personal pension framework, which is exactly why the withdrawal of the rules closed the product.

Level, increasing and decreasing cover

Pension term assurance policies came in the same three shapes as ordinary term cover, and the shape determines what the payout is worth as the years pass. With level term insurance, the payout your loved ones receive remains level throughout the term of the policy¹. As the name suggests, the payout your family would receive with decreasing term insurance gets smaller over the term of the policy¹. With increasing term insurance, the size of the payout increases as the term of your policy continues¹.

The choice matters most over long terms, because inflation quietly does the work that the payout pattern has to answer. A level payout that looked generous at the outset buys less each year prices rise, which is the problem increasing cover exists to solve. Increasing term starts at the same price as level term cover¹, so the early premiums are comparable, but the payout and normally the premiums rise as the term continues. Decreasing cover is usually the cheapest at the outset because the insurer's liability shrinks each year, and it tends to be used where the thing being protected, most often a repayment mortgage, is itself shrinking.

If your policy has an index-linked increase, the question of whether to accept each year's increase is covered in the FAQs above, and the comparison of level or increasing cover and the page on indexation set out the trade-offs in full. The one thing that cannot be undone is the term itself: the pattern you chose at the outset is the pattern the policy keeps.

No cash value and no retirement income

Despite the word pension in its name, pension term assurance is insurance, not a pension. The policy has no cash-in value, so you get nothing back if you cancel it, stop paying, or survive to the end of the term¹. There is no pot of money building up, no fund you can transfer, and no income or lump sum waiting for you at retirement. The premiums buy protection, and once each premium is paid it is gone.

This is the sharpest contrast with an actual pension. If you stop paying into a workplace pension scheme, you still get that pension when you reach the scheme's pension age¹³: the contributions already made remain yours, invested and waiting. With pension term assurance, stopping payment does not leave a part-paid benefit behind; it leaves nothing. The tax relief the product offered was relief on an insurance premium, not a contribution building a retirement fund.

The name also causes confusion about who is holding the policy. Personal pension schemes, including stakeholder pension schemes, are provided by insurance companies, banks and building societies¹⁴, and pension term assurance was sold alongside those products by the same firms. That shared heritage is where the pension label comes from, but it does not give the policy any of a pension's features. If you were counting on this policy for retirement income, it will not provide any: its only financial event is the lump sum on death or terminal illness. Anything you need at retirement has to come from elsewhere, and the pensions guide covers those options.

Missed payments, lapses and cancelling a policy

The rule to hold on to is the one in the section above: the policy has no cash-in value¹. That shapes everything about missed payments. With life policies of this kind, if you stop paying the premium the policy is cancelled and you get nothing back⁷. A policy that lapses therefore costs you the cover and the money already paid in, and because the product is closed, a lapsed policy cannot be replaced with an equivalent one that carries pension tax relief.

Before missing a payment, it is worth checking what the policy contains. Some protection policies include options that can keep cover in force in hard circumstances, and the page on missed premiums and lapsed cover explains those, including whether a lapsed policy can be reinstated and on what terms. Whatever the answer, the decision is the insurer's under its own terms, not a right.

Cancelling a policy of this kind is also treated differently from most financial products, because the rules deliberately limit the cancellation rights on life policies and pension contracts. There is no right to cancel a non-distance contract that is a life policy or a pension contract in several situations, including where the contract is for a term of six months or less, unless it is a single premium contract where the designated retirement date is within six months of the date of the policy¹⁵. The same rules exclude contracts effected by trustees of an occupational pension scheme or by the employer, trustees or operator of a stakeholder pension scheme, such as a pension buy-out contract¹⁵. There is also no right to cancel a pension annuity, a pension policy, a pension contract, or a contract to join a personal pension scheme or stakeholder pension scheme which is funded, wholly or in part, from payments derived from compensation or redress following a review undertaken in relation to a complaint¹⁶. For an existing pension term assurance policyholder, the practical position is that the usual cooling-off period that applies to most financial products may not apply here, so any decision to cancel should be taken as final before acting on it.

How to make a claim

A claim on a pension term assurance policy is made in the same way as a claim on any term life policy: the insurer is notified, evidence is provided, and the insurer assesses and pays the claim under the policy terms. On death, that means the people handling the estate or the beneficiaries contact the insurer as soon as they can. The pages on claiming after a death, the documents needed for a payout and how long a claim takes walk through the process in detail.

A terminal illness claim has an extra evidential step. Under the terms of schemes that pay a terminal illness benefit, the claim requires confirmation from a GP or Consultant that life expectancy is less than twelve months¹⁷. The insurer will ask for that medical evidence, and the payout is brought forward on the strength of it rather than waiting for death.

If a payment is delayed, the question of interest depends on who delayed it and why. Where pension payments were not received on time because of an administrative error, the Financial Ombudsman Service can order the firm to pay the missed payments plus interest up to the date of payment¹⁸. Other bodies show that interest is not a general entitlement: the Pension Protection Fund calculates interest due on certain arrears at the rate prescribed in legislation¹⁹, while a one-off State Pension arrears payment carries no interest at all²⁰. So interest on a delayed insurance claim is something to be argued for in a complaint, not something that arrives automatically. If a claim is refused or paid late, the complaint route in the final section of this page is the next step.

Where terminal illness cover does not apply

Terminal illness cover is included in term assurance policies at no added cost, but it has edges, and knowing them before a diagnosis matters. The benefit is typically available where you are not expected to survive more than 12 months, which matches the medical test used elsewhere in the pension world: a terminal illness payment requires GP or Consultant confirmation that life expectancy is less than twelve months¹⁷. A diagnosis that is serious but not expected to be fatal within that window, such as many critical illnesses, does not trigger terminal illness cover; that is the job of separate critical illness cover, and the comparison of critical illness versus terminal illness cover sets out the difference.

The provider's terms also state that terminal illness cover is not always available in the last 12 to 18 months of the policy. The logic is about what the insurance is for: term assurance exists to protect against dying before your dependants are financially established, and in the final months of the term the policy is about to end in any event. A policyholder diagnosed late in the term may therefore find the death benefit is all that remains, payable to the family rather than to them.

Lump sum death benefits are also treated differently across the pension landscape, which is worth knowing if your policy sits alongside other pension savings. The Pension Protection Fund, for example, states that relevant lump sum retirement benefit schemes are not eligible for its protection²¹. Pension term assurance's own lump sum is an insurance payout rather than a pension benefit, but the boundary between the two is exactly the kind of detail worth confirming with the insurer and, where the sums are large, with a financial adviser.

Pension term assurance and inheritance tax changes

The inheritance tax treatment of pensions is changing, and anyone whose plans were built around the old rules needs to know how. The government has announced that from 6 April 2027 most unused pension funds will form part of a person's estate and may be subject to inheritance tax⁴. This is a technical change to the processes for UK-registered pension schemes²², and it reverses the long-standing position that a pension could often be passed on free of inheritance tax.

The new rules change who deals with the tax. Pension scheme administrators will become liable for reporting and paying any Inheritance Tax due on pensions to HMRC²². On the beneficiary side, non-exempt beneficiaries are now jointly and severally liable with the personal representatives for any Inheritance Tax due on the pension benefits they have inherited⁴. In plain terms, someone inheriting a pension can no longer assume the tax is entirely somebody else's problem. The reporting rules also look back: if the deceased transferred pension benefits, made a nomination, appointment or assignment, or made any changes to the pension in the 2 years before they died, that history forms part of what has to be reported²³.

For pension term assurance policyholders the relevance is indirect but real. The policy's own payout is a life insurance lump sum, not an unused pension fund, so the April 2027 change does not itself bring the payout into the estate. Whether a life insurance payout is subject to inheritance tax depends on how the policy is arranged, and the pages on life insurance in trust and life insurance and inheritance tax cover that. But the wider shift matters to the same households: families that relied on pensions passing free of inheritance tax, and on life cover filling the gap, should look at the whole picture together. The tax guide covers inheritance tax generally.

FSCS protection and complaints

If the insurer that holds your policy were to fail, the Financial Services Compensation Scheme steps in. Generally, FSCS can protect pensions that are provided by UK-regulated insurers, as long as they qualify as contracts of long-term insurance³. Where FSCS can pay compensation, it covers the pension at 100% with no upper cap³. The same table of insurance protection shows insured personal pensions covered at 100% where the firm failed on or after 3 July 2015²⁴. That uncapped protection is unusual in financial services, where most compensation is capped, and it exists because a life policy is a long-term promise that cannot simply be refunded.

The protection is not identical for everything connected to a pension. FSCS protection varies depending on the type of pension product, and there are limits to the amount it can compensate²⁵. FSCS also protects pension advice, so it can pay compensation where an adviser fails in the advice it gave²⁶. If you are getting a pension, or thinking of changing it, FSCS publishes key questions to ask any provider, including whether FSCS protects the pension, how much of the pot is protected, and whether protection continues if you buy an annuity or transfer money across from an existing pension²⁷. Claims against an insurer, bank or investment firm that failed before 1 December 2001 are covered by the rules governing the separate compensation schemes that existed before that date²⁸, which matters for very old policies.

For complaints, the route is the firm first and then the Financial Ombudsman Service. The ombudsman can consider complaints about personal pensions and related products, and where pension payments were not received on time because of an administrative error it can tell the firm to pay the missed payments plus interest up to the date of payment¹⁸. Its service is free. The page on life insurance and FSCS covers the protection around protection policies in more detail, and consumer protection explains the wider framework.