Providing lump sum ‘death in service’ benefits to employees is commonplace, but ‘Relevant Life Policies’, a new life protection product aimed at business owners, provides an attractive alternative, especially in the following circumstances:
Where some employees are high earners: Since pensions ‘A day’, lump sum payments on death have formed part of the individual’s lifetime pension allowance (currently £1.8 million). If a payment takes an individual’s pension savings over this limit, the excess will be taxed at a punitive 55%. However, the proceeds from relevant life policies do not form part of an individual’s annual or lifetime allowance – nor should they attract income tax or IHT, since policies are usually written in trust for the benefit of the employee and their family*. Furthermore, premiums are not normally taxed as a benefit in kind – which can mean significant savings for higher earners.
Where a group life policy is unavailable due to company size: Small businesses frequently do not have enough eligible employees to warrant a group risk scheme, as many providers require five or more members. However, relevant life policies are single life, stand-alone death-in-service plans providing benefits on an individual basis and may be cheaper than a personal policy. As with ‘normal’ group schemes, the premiums paid by the company are tax deductible from profits.
Contractors or freelancers running their own limited company can also take out a relevant life policy to provide life cover on the life of the contractor/director and any other employee working for the company, rather than paying premiums out of taxed income.
Where scheme top-ups are required: Relevant life policies can run alongside a group risk scheme, tailored to meet the needs of individual employees. Sometimes the existing scheme is too restrictive: it may not include bonuses and commission as part of earnings or dictate an upper cap on benefits.
Unlike group schemes, protection need not end once the employee leaves the company. The benefits of relevant life policies can be appointed to the departing employee as a personal scheme and even moved to their next place of work (if the new employer is happy to accept the plan). Companies that plan to merge or re-structure may find this a particularly useful feature.
*Some trust arrangements may carry potential periodic or exit charges.