With nearly 22% of all companies in the UK approaching their financial year end in March now is the ideal time for clients to be considering ‘personalising profit’. By this we mean looking at how best they can make arrangements within their company to best serve their personal financial planning needs.
It goes without saying that retirement planning is one consideration and in this regard we recently published an article on the subject of A Director’s Retirement Strategy and the new rules on pension flexibility.
However, one key area often overlooked is that of financial protection planning. It is not untypical for individuals to affect their financial protection provision on a personal basis. Certainly where income protection and mortgage protection is concerned, plans for many reasons are, and should be, written on a personal basis. However, where life cover is concerned, there are options.
A word of caution! It is not a case of simply deciding to ‘get my company to pay my life cover premium’. Where this is considered on a personal life policy, the individual will find themselves incurring a benefit in kind on the value of the premium being paid on their behalf, which will consequently give rise to an Income Tax liability for them and likely a National Insurance liability for the employer. This defeats the point, as the true cost of the cover would actually increase.
The opportunity that exists is in the form of Relevant Life Cover, which is a tax-efficient way for a limited company to provide a cash lump sum on death or terminal illness for an employee whilst they remain an employee of the company.
Premiums paid by the limited company to a qualifying Relevant Life Policy are a tax deductible expense and are not assessable on the employee personally. Written under an appropriate trust, the sum assured, when paid, will neither be subject to Income Tax nor will it be included in the taxable estate of the deceased for Inheritance Tax (IHT).
Should the business cease trading or an individual consequently leaves the employment of the company, the policy must come to an end. However, there is a continuation option, which allows for a replacement policy to be affected for the same amount of cover and for the remainder of the original term without any further medical evidence. This is an important feature and one which may appeal to contractors, for example, if they anticipate going back to permanent employment.
The sum assured available is usually linked to a multiple of salary and dividends, with higher multiples of typically 20 times income available to younger individuals, with multiples reducing as age increases. These will usually be adequate to provide any reasonable amount of cover needed.
One popular piece of planning, particular where plans are being considered shortly before a financial year end, is to take these out on an annual premium basis. These will allow the full cost of the year’s cover to be offset against profits within the current trading year.
In order to keep the cost of this down, many of these are written on a low start basis. This is obviously beneficial to the company where an individual leaves after only a short time.
These policies are seen as a viable option for those looking to provide employee benefits for a small number of key employees. Small businesses or those where individuals employ their spouses / partners may be examples of such. Where 5 or more lives are being considered, a group death in service arrangement may be a more appropriate solution.
Also, some insurers offer valuable additional employee benefits within their Relevant Life Cover plan that are also tax free, e.g. discounted fitness trackers, half price trainers, half price health screens, half price Virgin Active Gym membership (worth £76 per month in London!), up to £500 off a bike etc, etc. All employee benefits designed to keep you and your work force in good health, and less likely to be off work due to illness.
As with any financial protection planning review, there may be the opportunity to revisit existing provision and not only restructure it to a more tax efficient basis, but also reduce the overall net cost. With advances in medical science, increases in average mortality and, of course, increased market competition the cost of life cover provision is constantly reducing.
Feel free to contact us to discuss your financial protection planning and how Relevant Life Cover may fit into it.