Relevant life policies can offer advisers an excellent path into the company protection arena. But how do they work? Jerry Bayman explains.
The only other restriction to be aware of is that the main purpose of the policy must not be tax avoidance. This is increasingly seen in legislation these days so some care needs to be taken.
The plan needs to be set up for genuine protection of dependants, so should not be used for key-person or share-protection. Advisers should also try to avoid an exact like-for-like ‘swap’ of cover as HMRC could say the only reason for the RLP is the tax savings.
The first and main market is the large numbers of small limited companies with too few lives to warrant a group scheme. It is seldom profitable for them to offer terms below five lives, but as RLPs are written on a single life basis, even a one-man company can be covered, and each policy can be tailored to suit the needs of each individual.
Secondly, the policy can also be used to top up benefits for an existing group scheme where the scheme rules do not allow additional voluntary benefits. As long as the employer is happy to pay the cost or enter into a salary-sacrifice arrangement they can be a useful and tax-efficient tool.
The third market is the high earner who is in a registered group scheme. The issue here is that these schemes come under pension legislation and can affect the lifetime allowance.
Any lump sum payment on the death of a scheme member forms part of their accumulated pension pot for calculation of the lifetime allowance. The current limit (2012-2013) is £1.5m, so someone on £400,000 per annum entitled to a four times salary lump sum on death, has already bust the lifetime limit by £100,000. That excess will betaxed at 55% as will the additional return of pension fund payable on death.
Moving these individuals into RLPs should be a consideration. Also, anyone who has taken previous pension protection should be very wary about entering a new registered death-in-service arrangement as they might lose their protection. Again an RLP is exempt from these rules as it is non-registered.
There are a number of actions that advisers can take when approaching the market:
Look at your client bank and pull out anyone who is a company director, ask these simple questions:
- Do they have dependants?
- Do they have life cover?
- How are they paying for it?