After such a turbulent period, many people have asked what they can do to better protect their family’s finances should the worst happen. Employees have also been asking employers what support is available if they were to become seriously ill or injured whilst at work. Here, a relevant life plan may be particularly useful. Below, our team here at Vesta Wealth explains how this works, where it might be applicable and how it can integrate effectively into a financial plan.
What is a relevant life plan?
In short, an employer can arrange a relevant life plan for an employee, which pays out to their family (or dependents) upon death. Whilst it may be little emotional comfort, this type of plan can provide a much-needed lump sum to help cushion the financial blow of a tragic situation. When set up correctly, it can provide some useful tax benefits too.
For small businesses, a relevant life plan can be especially useful since these are unlikely to have enough employees to warrant a group life scheme. It not only pays out a lump sum in the event of death, but also usually if the employee is diagnosed with a terminal illness.
The benefits of a relevant life plan
Perhaps one of the biggest advantages to a relevant life plan is the peace of mind it offers your employees. Many of them will rest easier knowing that their families have a financial safety net, should the worst happen. For a business owner, this often then translates into improved morale, loyalty and productivity amongst your team, saving costs and, potentially, improving revenues.
For an employee, gaining access to a new life insurance scheme via your workplace reduces the need to take out your own policy. This could, therefore, help save you a personal monthly expense (although you may still want to consider other types of protection such as critical illness cover). Additionally, for high-earning employees or directors who also have large pension funds a relevant life plan is often very attractive as they do not form part of the pensions lifetime allowance (£1,073,100 in 2021-22).
It is worth noting that plans such as these can only be accessed via a financial planner, who can outline the full range of options available. A relevant life policy can be significantly cheaper than an ordinary life policy, sometimes by as much as up to 50%.
Remember that these plans do not have cash-in value at any time and will only remain valid if you pay the premiums throughout the policy term.
How should a relevant life plan be set up?
For an employer, it is crucial that a relevant life plan be set up properly. Again, your financial planner can help you do this by ensuring that:
- The policy is ‘single life’.
- The policy covers the right employee.
- You understand how to pay the premiums correctly across the policy’s term.
- The policy is written correctly into a trust.
- The policy ends at the right time e.g. age 75.
Your employee must be a resident of the UK or an employee of a UK-resident business. It will normally be apparent whether the person you are looking to cover is classed as self employed or employed in the eyes of HMRC, by looking at how they are taxed on their earnings each financial year. The maximum amount of remuneration varies according to a range of factors, particularly the employee’s age. For instance, a 25-year-old may be entitled to 25x remuneration, but a 65-year-old employee may only be entitled to 15x remuneration.
How a relevant life plan helps with tax
There are tax benefits available both to employees and employers with a relevant life plan. Firstly, the premiums are not usually regarded as a P11D benefit in kind or as employee income. This means that the employee will not typically pay income tax on the premiums. Also, the employer and employee will not pay national insurance contributions (NICs) on premiums.
Provided the premiums are paid wholly and exclusively for the purposes of the business, these premiums can usually be treated as an expense by the employer, thus mitigating a corporation tax bill. Furthermore, relevant life plans are not included in an annual/lifetime pension allowance, so they should not trigger a pensions lifetime allowance tax charge for the employee when they die.
Finally, for the employee, there can be an attractive inheritance tax advantage to a relevant life plan. Typically, benefits paid from such a plan are not usually treated as part of an employee’s estate when they die, meaning the lump sum given to his/her surviving family members should not be subject to inheritance tax (IHT). However, there can be situations when an IHT charge does apply. Again, a financial planner can help you navigate this carefully.
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.