A Relevant Life Policy is a tax efficient life assurance product for businesses, recognised and understood by HMRC and governed by the same legislation that deals with group life pension schemes (the Income Tax (Earnings and Pensions) Act 2003).
It is an alternative way of providing a lump sum on death for an individual, without the need to set up a registered group life scheme. This product is particularly useful where small businesses do not have enough eligible or relevant employees to warrant a group life scheme. It also offers additional benefits for high-earning employees who have substantial pension funds and do not want their death in service benefits to form part of their lifetime allowance.
Relevant life policies can also be used by Directors of a company. The business can be a limited company, a limited liability partnership, a partnership, a charity or a sole trader. However, sole traders, equity partners and members cannot be the life assured.
What are the advantages and benefits of taking on a relevant life policy?
Firstly, the benefit will not form part of the employee’s lifetime pension allowance or part of their annual allowance. The employee is therefore still able to make full use of their annual allowance to make contributions to a registered pension scheme. Secondly, the relevant life policy premiums paid by employers are not normally assessable on the employee as a benefit in kind so are therefore not subject to income tax. Neither are they normally assessable for employer or employee National Insurance contributions. The premiums may also be treated as an allowable expense for the employer in calculating their tax liability, provided that the local inspector of taxes is satisfied they qualify under the ‘wholly and exclusively’ rules.
There are a number of conditions laid down in the legislation for relevant life policies:
1. Only life cover can be provided and benefits are payable only as a lump sum to an individual or a charity, for example through a trust
2. No dependant’s pension can be provided, although the lump sum could be used to buy an annuity as an alternative to a widow’s or dependant’s pension
3. Benefits must cease at age 75 and there can be no significant policy surrender value. There is no statutory limit to the amount of benefit that can be provided but any product providers will set their own limits
A Relevant Life Policy can be a tax-efficient addition to other pension investments including membership of a group scheme, or can provide a stand-alone pension for an individual, in the absence of other provision.
If you want to find out more about Relevant Life Policies, please feel free to get in touch with us directly.