HMRC pension allowance changes make ‘relevant life’ insurance potentially more attractive for some high-earners in small businesses.

Just about everyone is conscious of the need to be sure that in the event of untimely death of a breadwinner there is adequate financial provision for the ongoing needs of their family. Not everyone acts on this because of other financial priorities or perhaps because they (unwisely) feel confident they won’t be the one falling victim. Previous articles have discussed the various forms of income protection, critical illness and life insurance that play a vital part in protecting the financial security of families.

When reviewing such provision and the levels of cover needed, it makes sense to take into account the existence of employee benefits that may include a spouse’s pension and a lump sum death-in-service payment, usually a fixed multiple of annual salary – but it is vital to reassess these with a professional adviser upon a change of job or any other circumstances that may affect eligibility. The death-in-service benefit is itself a form of insurance policy and is often an integral part of the pension arrangements.

As we all know, not everyone has an occupational pension or death-in-service cover. They would normally need to make their own insurance provision and pay premiums without the benefit of tax relief. It is, however, sometimes possible for an employer to fund life cover on behalf of an employee or director, with premiums allowable against tax. This is a form of ‘relevant life’ cover – highly relevant to the employer-employee relationship.

A life policy that qualifies as a ‘single-life relevant life policy’ under the Income Tax (Earnings and Pensions) Act 2003 has a number of attractions as a means of providing a lump sum if an employee dies. Firstly, there is no obligation on the company to open a registered group life scheme, making it suitable for employees and directors of small businesses – though some of these entities will be reviewing provision, with their advisers, in advance of their specific staging date for pension auto-enrolment. Premiums are usually not only an allowable expense for tax purposes but also attract no employers’ National Insurance liability.

The advantages for employees, provided a policy is appropriate to their circumstances, include this product not usually being deemed a benefit in kind, so there is no income tax charge and no employees’ National Insurance due on the premiums. For high earners, another perk is that relevant life cover does not create a charge against their annual allowance for pension saving with tax relief, which became even more significant when HMRC cut the annual allowance from £255,000 to £50,000 last April – or against the lifetime allowance that is set to fall from £1.8 million to £1.5 million in April 2012.

For maximum advantage, a relevant life policy may involve a trust that means benefits paid out are not usually deemed to be part of the deceased’s estate under current rules, though Inheritance Tax may arise under provisions for discretionary trusts. Your adviser will be able to clarify the complexities and also explain how the arrangement can benefit an employee or director in the long run at no cost to the company if it forms part of a ‘salary sacrifice’ arrangement. Cover under a relevant life policy must end by age 75 and such policies have little or no surrender value.

It is important to take professional advice before making any decision relating to your personal finances.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE. YOU MAY GET BACK LESS THAN YOU INVEST. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.