Standard Life has become the latest life insurer to launch a pension term assurance policy, joining a small but growing group of companies that are taking advantage of this new market.

For those who are not familiar with pension term assurance (PTA), it is a specific type of policy that could help taxpayers to make significant savings on their life cover. It has been possible to purchase life insurance within a tax-free wrapper before now, but the rules on buying life cover within your pension have now been relaxed.

Before April 6, the sums permitted within pension policies were so small that it was barely worth the bother. Now, however, you can purchase as much life cover as you like, although it will count towards your pension fund’s total value for tax purposes, so you need to stay within the lifetime allowance limit, currently £1.5 million.

Mick James, of Standard Life, says that staying within the lifetime limit is unlikely to be a concern for most customers. “It is something to keep an eye on, but given that only 250 of our individual pension customers have benefits of more than £1 million, I do not think this will be a problem for most people.”

The advantages of purchasing PTA instead of a conventional term-assurance policy are significant. Justin Modray, of Bestinvest, the independent financial adviser, says: “Buying term assurance within a pension has the advantage of tax relief on premiums, which can mean significant savings over a conventional policy.”

A male non-smoker buying £300,000 of level-term assurance from Legal & General would pay £27.25 a month. But if he chose pension level-term assurance, he would pay £25.25 a month if he were a basic-rate taxpayer, or only £19.39 if he were a higher-rate taxpayer.

Basic-rate taxpayers will have the 22 per cent tax rebated through the policy automatically, but higher-rate taxpayers must claim back the extra 18 per cent tax relief through their self-assessment tax returns.

You do not need an existing pension to buy pension term assurance, although the policies are unsuitable for non- taxpayers because premiums are slightly higher than for standard term assurance. Mr Modray explains: “Life companies are perhaps using the tax relief as an opportunity to increase the gross premium and boost profit margins.”

He says that although there are higher administrative costs with this type of policy, these do not fully account for the difference in basic premiums. “We would like to see life companies give consumers a fairer deal,” he says.

Nevertheless, any taxpayer who does not have life cover and needs it — and surveys suggest that this could be as many as one third of all parents — should consider PTA. Moreover, the relaxation of the PTA rules offers a great opportunity for those who already have life insurance to re-examine their cover.

The trick, as usual, is to shop around. As yet, there are only a few providers in the market, but that is likely to increase over the next few weeks. “Competition may well hot up,” Mr Modray says, although he does not believe that prices will shift significantly. “The market is already starting to look quite competitive. If you are seeking to cut costs on an existing policy, it could be worth waiting a few more weeks. But if you are looking for a new policy, I would suggest going ahead now to ensure that you have cover.”

There are drawbacks with PTA. At present, it is fairly difficult to obtain joint-life policies because life companies are concerned that they may have to unwind the arrangement if one party reaches the full lifetime allowance. Liverpool Victoria has stated that it will offer joint-life policies, so long as the Government does not say that they are prohibited, but Scottish Equitable, Legal & General and Friends Provident are offering only single-life policies at present.

Finally, there are some concerns that low premiums cannot be guaranteed for life. Some advisers believe that the Government may have underestimated the cost to the Revenue of this new tax relief and that it may withdraw the concession at some point in the future.

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