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Tax Relief on Life Assurance

TaxationWeb by Bob Fraser MBA MA FSFA

Bob Fraser, MBA, MA, FSFA, outlines the new tax relief for pension term assurance from 6 April 2006.

Background

Up until 6 April 2001, up to 5 per cent of an individual’s net relevant earnings could be used in each tax year to purchase pension term assurance. The disadvantage was that this reduced the amount that could then be paid as an actual pension contribution.

From 6 April 2001, this limit was significantly reduced, with only up to 10 per cent of the actual pension contribution being able be used in each tax year to purchase pension term assurance. Not only did this potentially restrict the cover available, but it also meant that no cover was possible if a pension contribution was not made in that year. This meant that there was no certainty of cover.

New Rules

Relief on Premiums

From ‘A’ Day (6 April 2006), the rules will change so that individuals will be able to get tax relief on their entire premium rather just on a limited amount. As a consequence, a basic rate taxpayer will obtain 22 per cent tax relief on premiums whilst a higher rate taxpayer will obtain 40 per cent relief. Thus if a premium is £35 a month, a higher rate taxpayer would only have to pay £21 if that cover was obtained through the pension. This means that individuals who already have individual life cover may find that they could cut their premiums by switching to a new policy after April 2006.

Increased Level of Cover

Again from ‘A’ Day (6 April 2006), the maximum tax-free death benefits which an employer can provide for an employee (which can of course be for the owner director in a close company) are the equivalent of the new pension life time allowance (which will be £1.5 million initially).

The amount paid as a death in service benefit will obviously reduce the amount of the life time allowance for pension benefits, but not if the death in service benefits are used to provide a dependant’s pension. Under the new rules, there can be as much dependant’s pension as employers are willing to provide, and this will not impact on the lifetime allowance. Of course, not all employers are going to provide all their employees with £1.5 million of life cover, or very large dependants’ pensions, but valued employees may be able to negotiate higher levels of life cover as part of their overall benefits package.

August 2005

Bob Fraser, MBA, MA, FSFA

Bob Fraser is an associate investment director and has achieved the highest level of professional advisory qualifications in the financial services industry. He is a Fellow by examination of Personal Finance Society, which is a specialist faculty of the Chartered Insurance Institute. He also holds a Masters of Business Administration degree.

Rensburg Investment Management is the largest company in the Rensburg group and a subsidiary of Rensburg plc, a public company whose shares are quoted on the London Stock Exchange. Its core business is investment management and it currently looks after around £3.0bn of funds for private investors, trustees, charities and pension funds. It provides independent financial planning advice and investment management services to both individuals and businesses in order to meet their financial objectives. Financial planning is the process by which resources and risks are firstly identified and then used or provided for in a way which best achieves financial goals and lifestyle. It provides detailed advice to clients across the whole range of financial planning issues from the provision of straightforward life assurance, to savings and retirement planning, to complex inheritance tax planning arrangements.

Rensburg is authorised and regulated by the Financial Services Authority (FSA) whose function is to provide investor protection through the regulation of financial product providers in securities and derivatives business.

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About The Author

Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence.

Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms. He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website.

Article Added Saturday, 20 August 2005

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