Update on the Equitable Life Payment Scheme
September 28th, 2011
After a long battle by policyholders the Financial Secretary, Mark Hoban, announced on 20 October 2010 that £1.5 billion would be put aside for the Equitable Life Payment Scheme (ELPS). This scheme was then formally enacted on 16 December 2010 by the Equitable Life (Payments) Act 2010 which also allowed the Treasury to make compensation payments free of tax and to disregard them for tax credit purposes.
As payments have now started to commence under the scheme and HM Revenue & Customs have recently confirmed the tax and tax credit implications of such payments, we thought it would be timely for us to outline the scheme for those individuals who might be affected.
What is the Equitable Life payment scheme?
This scheme was set up to by the Government to compensate around 1 million Equitable Life policyholders who suffered as a result of the poor regulation of Equitable Life.
How does the scheme work?
In summary, the ELPS will work as follows:
• Payments will be made to individuals who have suffered as a result of Government failures in the regulation of Equitable Life – These payments will be based on the “relative loss” suffered by the policyholder
• “Relative loss” is quantified as the difference between the actual returns received and assumed returns the policyholder could have received from a comparable policy with a similar company.
– Policyholders with With Profit Annuities (WPA) will receive 100% of their ‘relative loss’
– Other eligible with profits policyholders will receive lump sum payments of 22.4% of their ‘relative loss’, so (for example) a policyholder with a £10,000 ‘relative loss’ would receive £2,240
Of course, if the actual returns received in respect of an Equitable Life policy are higher than the ‘comparable policy’ then the investor will not be deemed to have suffered a loss and no compensation payment will be made
Who is eligible for compensation?
If you hold (or have previously held) an Equitable Life policy fulfilling any of the criteria below you should not have to take any action – The scheme should contact you by the end of June 2012. Although the first compensation payments have now already started under the scheme, clearly it will take some time to write to over 1 million policyholders.
The following policies will be eligible for compensation under the ELPS.
• An Equitable Life Conventional With-Profits (CWP) policy bought between 1 September 1992 and 31 December 2000 inclusive.
• An Equitable Life With-Profits Annuity (WPA) bought between 1 September 1992 and 31 December 2000 inclusive.
• An Equitable Life Accumulating With-Profits (AWP) policy (both individual and Group scheme policies) that either started between 1 September 1992 and 31 December 2000 inclusive or had a premium payment made into it between 1 January 1993 and 31 December 2000 inclusive.
Eligibility for a payment from the scheme is not affected if you have subsequently exited from Equitable Life. In practice this should mean that policyholders who owned a policy that is deemed to have incurred a loss will have the same eligibility regardless of whether they subsequently remained with, or have left Equitable Life
Likewise, where the holder of an eligible policy has died this will not affect eligibility for compensation – Payments from the scheme will be made to the deceased’s executors/personal representatives
Will I have to pay tax on any compensation payment I receive?
Any compensation payments made under the ELPS are disregarded for the purposes of income tax – This means that the payment will not be included when calculating any gains a policyholder may make on life assurance policies when they are surrendered
Payments under the scheme are disregarded for Capital Gains Tax purposes – this applies whether the payment is received by the original policyholder, a trustee, or personal representative (executor)
Where a policyholder has died any compensation payment made to their estate will also be disregarded for Inheritance tax purposes – However a payment made to a policyholder who is still alive would form part of their estate for Inheritance Tax purposes in the usual way.
Any compensation payments will not affect eligibility for child tax credits (CTC) and working tax credits (WTC) so individuals receiving these benefits will not have to report the compensation payment as part of their annual income.
Hopefully the above summary serves as a useful summary of how the Equitable Life Payment Scheme operates in practice. It is, of course, impossible for us to cover all the most frequently asked questions in a short article however your Financial Adviser will be able to assist you if you are affected by the above or are unsure whether you should be eligible for a compensation payment