Relevant life insurance is becoming increasingly popular for those who are interested in a tax-efficient way to pay out a cash lump sum in the event of death whilst employed.
Many companies provide employees with death in service benefits, which provide beneficiaries with a tax-free lump sum should the employee die whilst in work. However, this type of scheme is not suitable for very small companies where scale is required.
In addition, some death in service schemes are written under pension rules, and those with already large pension funds may prefer an alternative to the death in service scheme. There is a limit to how much (currently £1,073,100) that you can build up over a lifetime in your pension pot before a tax charge is due. Any lump sum payments (as opposed to dependant’s pension) under a registered death in service scheme fall into this pot, and any payments to the estate that come to more than the lifetime allowance, are taxed at 55%.
A simple way to avoid these issues is using a relevant life policy, which provides a simple and cost-effective alternative to a death in service scheme for small businesses. It is a tax-efficient way to provide an employee's dependants with a cash lump sum in the event of that employee's death whilst they remain employed by the company.
Relevant life is also becoming particularly popular for senior company employees and directors who may want more cover than is offered through a death in service scheme. A relevant life plan can therefore be used as a means of attracting talented individuals and tailoring benefits for key employees.
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The benefits of a relevant life policy.
Premiums paid by the company do not normally constitute a benefit in kind for the employee. For a higher rate taxpayer this can reduce costs by up to a third.
- There are normally no employer or employee National Insurance contributions to pay on the premiums.
- So long as the company’s accountant and the local inspector of taxes are happy that the premiums are ‘wholly and exclusively for the purpose of trade’ as part of the employee’s remuneration, they can be treated as a trading expense.
- As the benefits are payable through a discretionary trust, they will in most cases be paid free of inheritance tax.
- The plan is not written under pension legislation and benefits won't form part of the employee's lifetime allowance.
- If the employee ceases to be employed by the company, the policy must stop. That said, many plans now allow the former employee to take out a replacement policy for the same amount of cover, over the remainder of the original term, without any further medical evidence.
- Alternatively, the trustees can assign the plan to the employee. If the employee goes to another company, or starts up a new one, the new company can take over the plan and pick up the premiums.
Whilst there are some qualifying rules, a good protection adviser, with experience in business protection will be able to help you avoid the pitfalls.
Written by Peter Matthews FPFS , Chartered Financial Planner, Integrity365
Customer service is at the heart of everything Integrity365 do, from the early days of pensions and ISAs to investments and lump sum decisions, through to retirement and later life planning, they are here to support you through the key stages of your life with a holistic approach to financial planning.