Aviva Life & Pensions UK Limited · DRN-6254085

The complaint Mr M and Mrs M as Trustees of the M Trust complain about how Aviva Life & Pensions UK Limited have administered a reviewable whole of life policy the Trust holds. What happened Mrs M and her late husband (Mr M1) took out the policy in 1986 in order to mitigate their potential inheritance tax liability. It was taken out on a standard cover, joint life, second death basis and initially provided cover of £150,000 for annual premiums of £1,882. By 1999 the level of cover had risen to £166,350 for annual premiums of £2,084.72. The policy was subject to regular reviews but didn’t require any significant changes until the 2021 review. The outcome of the 2021 review was that in order to maintain the sum assured, the premiums needed to increase to £10,344.26. Alternatively, the premiums could remain at the same level, but the sum assured would fall to £80,128. Mrs M was unable to increase her premiums, so she accepted the reduction in the sum assured. The policy also failed the 2022 review and cover reduced to the minimum guaranteed amount of £31,759. However, Mr M complained to Aviva on behalf of the Trust. He raised concerns that the review had failed given that it hadn’t failed any of the previous reviews, the level of premium increase required to maintain the sum assured and also that Mrs M hadn’t ever been told that the policy was reviewable. Aviva looked into the concerns he’d raised but didn’t uphold the complaint. They explained that the policy’s reviewable nature had been made clear at the time it was taken out, and Mrs M and her late husband had accepted the policy on that basis. They also explained that the changes required at the 2021 review had largely come about because the policy’s underlying investment fund had been exhausted and a large increase in premiums was needed in order to maintain the level of cover. They were allowed to make these changes under the policy’s term and conditions, so they didn’t think they’d done anything wrong. Mr M didn’t accept Aviva’s findings and asked for our help with the matter. The complaint was considered by one of our investigators who though it should be upheld. In summary, he thought that Aviva’s communications hadn’t been in line with the required standards and hadn’t provided Mrs M with sufficient information to make an informed decision about the policy. If they had done so, then it was likely that Mrs M would have surrendered the policy in 2003. In order to put things right, he thought Aviva should refund the policy’s surrender value from 2003 and all the premiums paid since that time plus interest. Mr M accepted the investigator’s findings, but Aviva disagreed. They thought it was more likely that Mrs M would have looked to reconstruct the policy in 2003 in order to make it more sustainable and potentially last for the rest of her life. The investigator wasn’t persuaded to change his opinion as he thought that the potential increase in premium that would be required to provide sustainability would have been unaffordable. This was because Mr M1 was in very poor health at the time and Mrs M would have been making plans to survive on a reduced income when he passed.

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Aviva remained in disagreement with the outcome the investigator had reached, but made an offer to settle the complaint in order to bring the matter to a close. Their offer was based on a refund of the policy’s surrender value from 2003 plus interest and a refund of half of the premiums paid since 2003. However, the trustees didn’t accept this offer, so the complaint was passed to me to decide. I recently issued a provisional decision where I said: “I’ve considered all the available evidence and arguments to decide what’s fair and reasonable in the circumstances of this complaint. Having done so, I don’t think this complaint should be upheld and I will now explain why. The only remaining areas of dispute are centred on the outcome of the 2021 review, so I’ve focused my decision on this aspect of the complaint. In making my decision, I’ve considered if Aviva met their regulatory obligations and I’ve set out below what I consider to be the relevant standards I’ve taken into account: • The FCA’s Principles for Businesses, in particular Principle 6 and Principle 7; • The FCA’s Conduct of Business Sourcebook (COBS), in particular COBS 2.1.1R(1) and COBS 4.2.1R(1) • The FCA’s Final Guidance on the “Fair treatment of long-standing customers in the life insurance sector” (FG16/8). Having considered these standards, I agree with the investigator’s opinion that Aviva didn’t provide Mrs M with sufficient information about the policy. What I’ve drawn from the standards is that they should have provided the late Mr M1 and Mrs M with clear, fair and not misleading information about the policy. Their communications should have included key details about the policy such as its performance, the value of its underlying fund and any fees and charges that had been applied. They should have provided this information within around 12 months of the point where the costs of policy started to overtake the premiums being paid in December 2002, so by December 2003. The information provided by Aviva shows that by December 2003, the policy’s annual charges were £2,315.05 versus annual premiums of £2,084.72. This would continue to rise over time and by December 2021, annual charges were in excess of £12,000. The increase in charges over time would mean that unless the sum of the premiums and the return from the policy’s underlying fund was sufficient to meet these costs, an ever-increasing number of units in the fund would have to be sold down. This could lead to a scenario where the fund could be completely diminished and the premiums would have to increase, potentially significantly, to a level that would support the policy. I appreciate that a consumer ought to be aware that their policy might face changes over time, but I don’t think they would necessarily be aware of the potential scale of those changes. This is why I think the point where the costs of the policy start to overtake the premiums being paid represents an important tipping point. It is at this point where the units in the policy’s underlying fund start being used to meet the policy’s charges and as I’ve previously noted, over time, more and more units will need to be sold to meet these costs. So, unless changes are made to the policy, it may eventually become unaffordable or no longer fit for its original purpose. If a consumer can make changes to their policy before the underlying fund is diminished, less significant changes will be required than if made later down the line. Alternatively, a consumer who is aware of the significant changes their policy might require in the future, might decide it is failing to meet its objectives, and chose to

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surrender it before the fund starts to diminish. Or they might decide to maintain the policy on its existing terms right up to the point when it fails a review and changes will be enforced. Therefore, the opportunity for a consumer to make these decisions is a key event in the life of the policy. Those decisions become more difficult the longer the consumer pays into the policy and the options available for mitigating poor outcomes start to diminish. So, it is in the consumer’s interest to make key decisions at an early stage in the policy’s life cycle, and in order to do so in a fully informed way, firms need to provide consumers with clear, fair and not misleading information. I’ve reviewed the communications sent by Aviva. From what I’ve seen, some information was being provided: • From 2009 onwards, a projection of how long the policy would be expected to last on its existing terms, but no explanation of what would happen to the policy thereafter. • Yearly statements showing the value of the policy’s underlying fund and the number of units held. • From 2016 onwards, there were warnings in the annual review letters which said: “IMPORTANT - If your priority is to maintain your current level of benefit either throughout life or for a specific number of years, and your projection doesn’t show this is likely, we would strongly urge you to consider taking action. Your policy is designed to be flexible which means you can ask to make alterations such as increasing your premium or reducing your benefit as your protection needs change. We can provide you with quotations to show the premium we currently estimate would be needed to maintain your benefit throughout life. Alternatively we can calculate the reduced benefit that we estimate your current premium might support throughout life. Please contact us on ……. and we’ll be happy to provide further information about your options.” What is my current cash-in value? - Your cash-in value as at …… is £…….. This amount is not guaranteed and can change on a daily basis. If the values shown in your projections are lower than your current value, this means that the cost of providing your benefit until the projection date will be higher than the amount of premiums you will pay until then. The difference between the cost of your benefit and your premium amount will be met from your fund, which is why the cash-in value may reduce over time. However, at no point did Aviva provide details of the current costs of the policy, an explanation that they would continue to increase over time and what this meant for the future of the policy. Also, there were no alternative options provided which would make the policy more sustainable over the long-term. Because this level of information wasn’t provided, I don’t think the late Mr M1 and Mrs M were put in a fully informed position about the policy or any possible steps they could take to mitigate future risks. I’ve therefore considered the likely course of action they would’ve taken if they’d been put in an informed position in 2003. Aviva should have explained that the costs of the policy were higher than the premiums being paid, the impact of this would be that while the policy wouldn’t require any changes at that time, it would likely need changes in the future.

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This could lead to a few different outcomes for the late Mr M1 and Mrs M, so I’ve considered what Mrs M has said about her circumstances at the time in order to try and determine her likely course of action. The purpose of the policy was to mitigate IHT. Given this purpose, she could have surrendered the policy and taken other steps to mitigate the potential tax bill, but it wouldn’t have been as straightforward as keeping the policy in place. She could have surrendered the policy and looked elsewhere for cover, but the cost of a comparable non-reviewable policy would have been much higher than the existing policy given that both Mrs M and the late Mr M1 would have been in their seventies at the time. Also taking into account what Mrs M has said about not wanting to pay more in premiums because the late Mr M1 was in poor health at the time and her income would reduce after he passed, I don’t think she would have taken this option. She could have made changes to the policy, but as Mrs M didn’t want to increase premiums, this would involve reducing the sum assured which would potentially mean that it would no longer cover the potential IHT liability. This doesn’t seem likely as any reductions would be significant and the resulting sum assured wouldn’t be much higher than the policy’s existing minimum guaranteed sum assured of £31,759. There was the possibility that they would do nothing and accept future changes. It is difficult to determine exactly what course of action would have been taken at the time. Any decision I make must be made using the balance of probabilities, i.e. what is more likely than not to have happened at the time. In addition to the Mrs M’s testimony, I also have to take into account any contemporaneous evidence and I think Mrs M’s reaction to the review letters from 2016 onwards is telling. The letters carried a fairly serious warning that action needed to be taken if the policy was meant to last for life. The review letters from 2009 onwards gave a projection of how long the policy was expected to last, starting at 9 to 11 years in 2009 and falling steadily to 1.17 years by the time of the 2020 review. So despite being put on notice that the policy, which needed to last for the rest of her life in order to provide IHT mitigation upon her passing, wasn’t going to last forever, she didn’t take any action. She also didn’t take any action when the policy’s surrender value fell from £34,896.87 in 2016 to £13,088.95 in 2020, despite this information being provided in the annual statements she received. The fact that Mrs M took no action despite the content of the letters, makes me question if she would have taken any action even if she had been put in a fully informed position at an earlier date. My only reservation is that there was no indication of the implications of not taking action. The question I then have to ask is, would Mrs M have taken action earlier if she knew that by around 2021 the sum assured would fall from £166,350 to £80,128 if she didn’t increase her annual premiums from £2,084.72 to £10,344.26. And that the surrender value would be eroded over time by the significant level of charges being applied to the policy. But I need to consider this in light of the alternative options available at the time, taking into account the fact that Mrs M didn’t want to pay more for cover. And given her age, her options at the time would have been limited. It’s important to not make this decision with the benefit of hindsight, at that time Mrs M wouldn’t have known if or when a future claim on the policy might need to be made. Had a claim been made before 2021, she would’ve paid substantially less towards the policy and the sum assured wouldn’t have reduced. Taking everything into account, and while I accept it will come as disappointment to Mr M and Mrs M, I’m not persuaded that the available evidence points to a conclusion that Mrs M would have surrendered the policy in 2003 or taken different steps even if Aviva had

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provided more information. It seems more likely that the lack of reasonable alternatives means she would have taken the same course of action, and looked to keep as much cover as possible for the premiums she was paying, with the knowledge that the policy’s sum assured wouldn’t fall any lower than £31,759.” Responses to my provisional decision Aviva accepted my findings and didn’t make any further submissions. Mr M and Mrs M didn’t agree and made the following points, in summary: • They’d accepted the investigator’s proposed redress. • They disagreed that the policy’s reviewable nature had been made clear to them. At the time the policy was taken out, Aviva’s representative had confirmed that the policy was specially to fund inheritance tax and the life cover in respect of the second life was a guaranteed sum of £150,000 plus whatever additional value remained in the investment. The guaranteed sum was clearly noted in Aviva’s acceptance of the application. They’d been informed that as circumstances changed and inheritance tax liabilities changed, they could review the policy with changes to the premium and the guaranteed life cover. This was done on at least one occasion prior to Mr M1’s death. • Both the investigator and I had agreed that Aviva's communication and provision of information was poor and lacking in details and options. But my opinion was that Mrs M would not have surrendered the policy and taken other steps to mitigate the potential tax bill with Aviva. They disagreed with my opinion it would not be very straightforward. This was because it would have been very straightforward to simply deposit the proceeds directly into a deposit account or invested the sum in a stocks and shares account. This would have provided a significant return if the money that would have been used to pay premiums and also interest had been reinvested in the FTSE 100 or S&P 500. • In 2003 Aviva knew that the longer a person lives, the more they will have spent in premiums and given extra-long life as in the case of Mrs M, the return reduces substantially and is difficult to afford. Aviva currently advise of this in their marketing information. Mrs M's parents lived until their late nineties and the likelihood was that she would live for some time to come. It was therefore obvious that doing something else on a life assurance basis with Aviva was not appropriate for funding inheritance tax liabilities when other options were available that were straightforward. • I’d stressed the information in the various reviews subsequent and post 2016 but given that Mrs M wasn’t in a position to increase the premium, this wasn’t relevant. What was relevant was the knowledge that Aviva were using the investment fund to add to the premium to offset some increases in the cost of running the policy. Mr M and Mrs M were never aware that Aviva could do this. • Mr M explained that Mrs M had never made any statement or testimony and he didn’t have the correspondence post 2009 until 2020 to hand, but in 2020 the letter on the first page in a large text box states in bold “The outcome of this review is that we will guarantee your current benefit amount until the next review.” So, as far as Mrs M was concerned, everything was as it was envisaged it should be. • Aviva’s offer was simplistic and they had to take legal advice regarding the effect of the tax implications. They’d made a counteroffer to Aviva which was more precise, and only slightly above the initial offer but still lower than what the investigator had

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proposed, but it was rejected. • They thought I should reconsider my position especially since Mrs M had paid, without fail, each and every premium for the past 40 years amounting to nearly £90,000 on the belief the policy would pay about £166,000 to pay the IHT liability. However, the policy was never suitable for the payment of IHT for someone who survived well into their nineties, as Aviva knew well, and their lack of information did not bring the problem to Mrs M's attention until it was far too late. • The return they’d highlighted from an alternative investment into either the FTSE 100 or S&P 500 illustrated how unlikely it was that anyone would take out a policy of this nature if there was any likelihood of surviving into their eighties or nineties when there were other uncomplicated investment opportunities to provide a similar outcome. • They’d been told that the ombudsman's duty was to be as fair and reasonable as possible to all parties but to allow Mrs M's trust to receive on her death a sum of about £30,000 when nearly £90,000 was invested over 40 years with at least £166,000 expected to settle the IHT liability couldn’t be considered fair. What I’ve decided – and why I’ve considered all the available evidence and arguments to decide what’s fair and reasonable in the circumstances of this complaint. Having reconsidered everything in light of the available evidence and new submissions that have been made, I’m still not persuaded that this complaint should be upheld. I appreciate Mr M’s concerns that the reviewable nature of the policy wasn’t made clear at the time it was sold. But from what I’ve seen, the documentation that Mr M1 and Mrs M were given set out that the policy was reviewable, and changes could be made to either the guaranteed benefit or premiums. Taking this into account, I don’t think I can fairly say that the policy’s reviewable nature wasn’t disclosed. Moving on to the other aspects of the complaint, there isn’t any dispute that Aviva didn’t provide sufficient information about the policy from the time its costs overtook the premiums being paid. The main area of dispute that remains is around what likely course of action Mr M1 and Mrs M would have taken if they’d been provided with the required level of information. I note the points Mr M has made about the potential return if the policy had been surrendered in 2003 and the return used to make an investment. However, we must be careful to not rely too much on the benefit of hindsight. It would have been impossible to determine exactly how long Mrs M would live for, and it must also be taken into account that Mr M1 was in poor health at the time. This meant it would have made a decision to stop paying into the policy and give up the guaranteed sum assured of £166,350 very difficult. There would have a been a long period of time before an alternative investment would provide a comparable return and any return wouldn’t have been guaranteed, as it would have been dependent on market performance. It can now be seen as an easy decision, but this is with the benefit of hindsight. Because of this and also for the reasons I previously set out, I’m not persuaded that a different course of action would have been taken. I must stress that even though I’ve come to the conclusion that Aviva needed to provide

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more details about the policy, I must take into account the fact that they did provide some information. In deciding what Mrs M would’ve done at relevant times, I do need to consider how she reacted to the information she was given. This is important because even if Aviva had provided the required level of information, they wouldn’t have required her to take action in the same way a failed review required a change to the premium or sum assured. This is why I’ve put weight on the lack of action taken when the review letters started to project how long it would last. And the lack of action when the review letters gave a stark warning that the policy wouldn’t last for life; and urged Mrs M to act if she wanted it to last for life. This warning was provided in the 2016, 2017, 2018, 2019 and 2020 review letters. I accept that the first page of these review letters said that the benefit would be guaranteed for another year. However, there was also a warning saying that the letter was important, so I think that it was therefore reasonable to read more than just the first page. The warnings I’ve referred to were on the second page and were prominent, so I don’t think that they were easily missed. Taking all this into account, I don’t think it’s fair to say that Aviva didn’t let Mrs M know that the policy wouldn’t last for life – because all the reviews from 2009 onwards set out how long it would last. Despite that information, she didn’t enquire about making any changes. So, I remain of the opinion that even if Aviva had provided her with sufficient information she wouldn’t have taken a different course of action. I also appreciate the concerns that more money has been paid into the policy than the current sum assured will provide. However, the policy was never meant to be a savings product and there were no guarantees that a consumer wouldn’t pay more into the policy than it would return. This is part of the nature of insurance, and it must be taken into account that Aviva have been on risk since the time the policy was taken out. If there had been a claim at any point since inception, they would’ve needed to pay out a substantial lump sum and would’ve done so even if a relatively small level of premiums had been paid. I don’t think I’m being unfair or unreasonable in coming to this conclusion as I must be fair to both parties, not just a consumer making a complaint. Therefore, having reconsidered everything, I remain of the opinion that this complaint shouldn’t be upheld. My final decision For the reasons I’ve given above, I don’t uphold this complaint. Under the rules of the Financial Ombudsman Service, I’m required to ask Mr M and Mrs M as Trustees of the M trust to accept or reject my decision before 27 April 2026. Marc Purnell Ombudsman

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