The plans are a relatively recent addition to the protection stable, first becoming an option back in 2006 when the new pension simplification rules were introduced. Cover is in the form of a single life, non-registered policy paid for by the employer, with benefits under trust to provide a lump sum to an employee’s family in the event of the employee’s death.
Policies can include terminal illness benefit and the cover can be level, decreasing or increasing. Premiums can also be level or renewable and most plans will include a guaranteed insurability option to enable cover to be topped up following events such as marriage, the birth or adoption of a child, or an increase in the size of a mortgage.
Although most of the life assurance providers now offer a plan, the market initially developed slowly with Bright Grey the first to introduce a plan in 2008, followed shortly afterwards by Zurich.
Part of the problem was the internet. Although relevant life policies share many of the characteristics of an individual contract, some insurers’ online sales facilities could not accept a plan written on the life of another.
This meant either reverting to a paper transaction for this business or delaying the launch of a plan until the investment in technology was justified.
The benefits of relevant life policies also made some insurers cautious according to Ian Smart, head of product development and technical support at Bright Grey. “There were concerns that we were exploiting a loophole and these plans would be abolished once the taxman got wind of them,” he says. “But, providing they are used appropriately, they are completely within the pensions legislation.”
Tax breaks
Certainly the benefits can be compelling. The structure of a relevant life policy makes it a particularly tax-efficient way to provide cover, both for the employer and the employee.
For employees, as it is not treated as a benefit in kind, there is no income tax or national insurance to pay on the value of the premiums. In addition, as the benefit is written in trust for the family or other beneficiaries, any payout is outside the employee’s estate for inheritance tax purposes.
Further, and thanks to their inclusion in the pensions legislation, payouts can also benefit from favourable tax treatment. Unlike traditional death in service schemes, the benefits paid out under a relevant life policy do not count towards the lifetime allowance for pension savings, currently £1.25m, but due to be reduced to £1m for the 2016-17 tax year.
As anything in excess of this limit is taxed at 55 per cent, this could potentially save a family receiving a life assurance payout of £500,000, a tax bill of up to £275,000.
There are also tax advantages for employers. In most cases the premiums will be treated as a business expense and will therefore qualify as an allowable deduction against corporation tax. This can slice a further 20 per cent off the premium.
Target markets
The way in which these policies are structured means they are suitable in a number of different circumstances. As benefits paid out under a relevant life policy do not count towards the lifetime allowance, they are particularly attractive to employees who have already accrued a significant pension pot.
This includes employees who have already been granted protection for their lifetime allowance. For these individuals, joining a standard group life scheme can be particularly hazardous as it invalidates this protection, pushing any excess pension pot into the 55 per cent tax bracket, as well as the potential pay-out from the life assurance.
These high earners are where Alex Pickard, senior consultant at PMI Health Group, has seen the most interest from large employers. “Employers recruiting high earners should be asking whether they have protection already, or if they are close to the lifetime allowance, to ensure they use a relevant life policy for their death benefits,” he explains.
While there has been interest from high earners, small groups are arguably the largest market for these plans. Although it has become easier for these companies to arrange traditional group benefits, choice can be much more limited where there are fewer than 10 employees within a scheme, with this lack of competition pushing up the cost of cover.
As well as offering them to employees, the insurance also appeals to company directors looking to secure savings on their life cover and push more expenses through the business.
Rather than pay for an individual policy themselves using taxed income, or being charged tax and national insurance on any group life cover under the benefit in kind rules, their employer can take out a relevant life policy on their behalf at a much lower cost.
The savings for these individuals can be significant. For a higher rate taxpayer, it is possible to cut the cost of cover by 49 per cent, as shown in Table 1.
Cover catches
Given the tax benefits on offer, it is hardly surprising there are some restrictions. In particular, policies can only include life cover and terminal illness benefit: other protection benefits such as waiver of premium, critical illness insurance and income protection are not permitted within a plan. Cover must also cease by the employee’s 75th birthday.
In addition, although these schemes have several tax advantages, there is the potential for a tax charge in relation to the trust wrapper. Although the benefits are paid to the employee’s family or dependants tax-free, the trust is subject to periodic charges in line with non-pension discretionary trust taxation rules.
These charges – 6 per cent of any excess over the inheritance tax nil-rate band – are levied on the value of the trust every 10 years. As it usually has no value, this is unlikely to cause any problems, unless an employee dies before a 10-year anniversary and the proceeds of the life cover are still within the trust.
For example, and assuming the nil-rate band is £325,000 at death, if a £750,000 payout were caught for these charges it would result in a tax bill of £25,500.
The other important point to look for is how the company is set up, especially when targeting smaller groups. As there must be some form of employer/employee relationship in place, relevant life policies are not suitable for sole traders, equity partners of a partnership or members of a limited liability partnership.
Identifying opportunities
As well as suiting a variety of different needs, relevant life cover also brings benefits to advisers. The relatively niche nature of the product, plus the benefits it can deliver, make it a great way to demonstrate expertise.
In addition, as it straddles the individual and group spaces, Chris Atkinson, retail protection proposition manager at Zurich, says it offers advisers an opportunity to expand into the corporate market.
“Many advisers will already have individual clients that are directors of small businesses who could benefit from a relevant life policy,” he explains.
“Speaking to them about this can open the door for discussions about business protection, auto-enrolment and other group benefits”, he added.
While they may be a relatively recent addition to the life assurance market, the benefits they offer to employers and advisers, mean relevant life policies have an important role to play in protection.
