One of the simplest forms of financial planning is that of Life insurance. It is one of the most boring, next to wills, and normally is top of the ‘I’ll do tomorrow’ list.
If you already have that piece of financial planning ticked, read on anyway as you may miss out.
As a Director, or employee of a company, many individuals are missing out on the easiest of tax breaks by not setting up their life cover through a company group scheme or indeed, another less talked-about plan called a ‘Relevant Life Plan’.
Let’s say you are due a wage rise and decide to take that rise, but also to use the money to ensure your loved ones are protected with a Life insurance policy.
Your employer pays National Insurance on your rise and so do you. Then you are hit with tax. Wonderful.
With the ‘surviving’ income from the above triple tax beating, you decide to take out a Life insurance policy to look after the family or to pay off mortgages/ debts.
More preferably, employees could avail themselves of a Relevant Life Policy instead and enjoy significant savings each month, or use those savings to buy more life cover than they would, had they simply taken the wage and bought a plan from their net income.
You would just need to ask your boss to set the plan up for you. Of course if you are a director who has life insurance taken out personally you can make this decision quickly yourself.
I used a 51 year old Director as an example to explain the savings. I have taken a figure of £1.5m as the sum assured to insure the customer, and assumed they were a higher rate tax payer.
I used £1.5m as an example, to cover a £300k mortgage and the remaining £1.2m, when invested, would give the family £48,000 per year at 4% to replace the income lost.
If the premium was paid out of net wages, the cost would come to £210.38 per month. If however, the premium was paid by the employer, the total cost, given the triple tax savings would be £107.21, a staggering 49% saving (it’s a 34% benefit for a basic rate tax payer).
Naturally if the employee (or you as a Director) wanted, they could use the whole premium and nearly double the cover.
The tricky bit is, there has to be an employee / employer relationship, so sole traders or equity partners of a partnership, or a limited liability partnership can’t have one.
If you are eligible, it makes sense to look at this straight away with your employer and/or Financial Adviser.
There are a few other benefits to setting the plan up this way:
For example, an individual who has reached their pension Lifetime Allowance limit would be disadvantaged by the more common group life insurance policy. The benefit from this plan is added to your retirement savings and could land you with a completely unnecessary charge of up to 55%.
Benefits of the Relevant Life Policy are paid out ‘in trust’ to the beneficiaries and without any Income Tax or Inheritance Tax, giving you a quintuple tax break.
If you have tried to take out a group life scheme, you will typically be allowed around four times your earnings as a maximum sum assured for a plan. Directors, of course, often pay themselves low incomes and roll profits into the business to expand for later years so cannot really have the life cover they need as the four-times limit blocks them.
A Relevant Life Policy allows much more flexibility, and whilst the maximum cover differs from company to company, one offers 30x annual remuneration.
Another flexible benefit is the ability to take your policy with you to another company. Your health may deteriorate over the years, and naturally as you are older, your premium would be greater if you started a new one. It’s more efficient to simply take your Relevant Life Policy with you to your new job.
About the author
Peter McGahan is Chief Executive of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
Hope that helps, and if you want further advice, please call 01872 222422 or visit WWFP.net.