The new tax year in April 2006 (or ‘A-Day’ as we all have been calling it) ushered in a major shake-up of the pension market. But many people – and some brokers – are still in the dark when it comes to some of the new tax breaks that were also introduced.
Life assurance tends to be overlooked by most consumers when they first take out their mortgage. The first difficulty occurs as nobody likes to consider the inevitable, especially when they are trying to move into their new home, filled with hopes and plans for an exciting life. But death, like paying taxes, is one of life’s few certainties.
Another historic stumbling block to the sale of this product was the fact that many consumers considered the products too expensive for what they perceived they were actually receiving. After all, when most consumers are in the process of purchasing a house and pouring all their savings into paying stamp duty, legal fees and other essential expenses, life assurance can seem to be a luxury.
However, ensuring that your client’s mortgage is paid off and their loved ones will not be lumbered with huge debts in the event the unexpected should happen is a prudent course of action for any broker to suggest. So how do you deal with this potentially sticky topic?
Well, in the past it was simply a matter of perseverance and skillfully navigating through these dangerous waters but, with recent legislative changes, it just got easier. Following ‘A-Day’, certain life assurance policies that protect against this have recently become cheaper.
New legislation
This new legislation means that if your client is a basic rate taxpayer, you could save them 22 per cent on their current life premium and if they are a higher rate taxpayer, they could save 40 per cent. So if your client’s monthly premium would currently be £100, they would save £22 or £40 respectively, paying £78 or £60 in monthly premiums.
This saving, however, only applies to level and decreasing term policies. These are policies that pay out a lump sum if death occurs within a set term. The cover can either remain level for the whole term or reduce gradually, perhaps to pay an outstanding mortgage balance.
As usual, in order to benefit from these changes, the client will have to take out a new policy, of the type described above. This is not as daunting as it sounds as it should be relatively simple for brokers to review the client’s current situation and provide them with a new policy with the tax reductions in-built.
A Pension Term Assurance product, as this life assurance is called, is a single life term assurance policy with tax relief on the premiums, and is available to almost any UK resident even if they do not have any pension provisions. Also, those with little or no income can contribute up to £3,600 each year and get tax relief. The Pension Term Assurance provides similar benefits to standard term assurance except certain policies are cheaper.
Caveats
There are, of course, a couple of caveats to be aware of.
An important point to consider when looking at this type of life assurance is that premiums paid into it will attract the tax relief provided that contributions are below the annual contribution allowance that currently stands at £215,000 for 2006/7 (rising each year to £255,000 in 2010-11).
Also, on death, the lump sum payment will be tax free provided the value of the pension fund and the value of the life cover are below the standard lifetime allowance (LA) which is currently £1.5 million for 2006/7. This allowance will increase incrementally each tax year for example £1.6 million for 2007/08 and £1.65 million for 2008/09. However, if the LA is exceeded as a result of the life assurance cover, there will be a 55 per cent tax charge on anything over this amount.
Potential saving
With a potential saving of 40 per cent off premiums, it is well worth urging your clients to review their life assurance requirements and possibly sign up for a new scheme or change their existing one. The benefits of switching to this type of policy are quite clear and for once, the taxman has actually made life easier for us. Life assurance, although not something everyone wants to consider, has just been made cheaper.
