It seems to be a little known fact that in the last budget, legislation was introduced which has created a tax loophole on a certain type of life insurance. We gather that early indications point to the fact that, for 50% of people, the most economical solution for their insurance needs may be a Pensions Life Insurance Policy.
The policy won’t be suitable for everyone as there are various qualifying aspects of the insurance, but there are certainly tax savings to be made for some people. The policies have a number of names, sometimes referred to as Pensions Life Insurance and we have seen Level Term Pensions Life Insurance used. The use of the word pension is a little misleading. They are not actually anything to do with pensions. They don’t provide a pension and it’s not necessary to have a pension in place already. It’s a small part of an extensive change in tax legislation relating mainly to pensions and inheritance tax.
Pensions Life Insurance will pay out a lump sum on death of the policyholder or diagnosis of a terminal illness, resulting in death within a year. There is no provision for joint policy holders, so each person participating has to have their own cover. Critical illness cover is a separate issue and cannot be included in the policy.
At present, Pensions Life policies are more costly than the more conventional life policies. They can cost around 15% more and this increase is justified by the insurance companies for the extra work needed to reclaim the tax relief.
The insurance company will deduct the standard rate of tax from your premium. If you pay tax at a higher rate, you will then need to reclaim the difference between the two rates when you complete your tax return. This should only need to be entered once as H M Inland Revenue should then automatically continue to give the relief for the life of the policy.
A couple of points that probably won’t bother too many people:
1. If your pension contributions added to your life insurance premiums come to more than £215,000 per annum, you will not be eligible to have a Pensions Life Policy.
2. If the payout from the policy, added to the value of your pension fund, is more than £1,500,000, then you will be taxed at 55% on the excess.
Conventional life insurance policies are not included in this calculation. The extent of the savings look considerable, with standard rate tax payers saving around 15% and higher rate payers reducing the cost of their premiums by 30%.
Because of the complexity of these new rules and the fact that these policies will not be suitable for everyone, it’s necessary for them to be brought via a broker who will advise you. At present it’s not possible to get a live quote on the internet but a call to a broker will result in up to date and competitive quotes being provided.
So, thank you Gordon Brown, for this unexpected bonus. Remember, though, to take expert advice before you take the plunge.
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