A little-known type of life assurance plan could provide you – or your employees – with highly tax-efficient life cover.
A ‘relevant life policy’ (RLP) is a special type of life assurance which an employer can provide without any benefit-in-kind tax charge on the employee. One reason why the RLP has remained relatively little used is that, for most employees, the normal pension rules cover their needs.
However, the erosion of the value of the standard lifetime allowance since 2012 has changed the picture for a growing number of higher-paid employees.
It is easy to see the appeal of life assurance with:
- The premiums paid by your employer.
- Tax relief for your employer as an allowable business expense.
- No income tax or national insurance contributions to pay on the premiums by the employer or employee.
- No pension lifetime allowance limits to worry about.
- No pension annual allowance issues.
- Benefits on death or diagnosis of a terminal illness payable under a flexible discretionary trust to your nominated beneficiaries (or charities).
- All payments normally free of inheritance tax.
If a pension policy pays out lump sum death benefits above someone’s available lifetime allowance, they are taxable at a flat rate of 55% on the excess above the LTA. For instance, in the current tax year a lump sum death benefit totalling £1.5 million provided by a registered pension scheme would be subject to £275,000 (£500,000 @ 55%) in tax if the standard lifetime allowance applies. But HM Revenue & Customs does not treat an RLP as a registered pension scheme, so the 55% tax charge would not apply in this case.
RLPs are especially useful for: small companies that do not have enough employees to set up a group life scheme; directors and senior employees who require life cover that won’t eat into their available lifetime allowance; employees who wish to top up benefits from their existing employer’s scheme; and directors who want to set up an employer-financed shareholder protection arrangement. Excepted group life policies can also be set up.
The savings from using an RLP against setting up personal cover and funding premiums through an increase to net pay can be significant. In an example, Gill is a higher rate taxpaying director who needs £500,000 of cover costing £1,000 a year in premiums. Using an RLP almost halves the employer’s cost. RLPs are subject to some special rules. For example, the policy cannot run beyond the employee’s 75th birthday, it can never acquire a surrender value and it cannot be used for tax avoidance purposes.
For more details of RLPs please contact us.
The Financial Conduct Authority does not regulate tax and trust advice.
Levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances.
Tax laws can change.
Occupational pension schemes are regulated by The Pensions Regulator.