LIFE ASSURANCE WITH TAX RELIEF (PENSION TERM ASSURANCE)
The introduction of pension simplification rules from the Government (A-Day) has meant that more people are now eligible to purchase and contribute to a term assurance policy with tax relief on the premiums.
Quite simply, it is life assurance cover provided within the wrapper of a Personal Pension Plan. It is designed to provide a lump sum on the member's death. However, the lump sum (or part of it) could be used to provide dependants' pensions.
Unlike earlier Pension Term Assurance plans, Clients no longer need to also contribute towards a Personal Pension Plan in order to be eligible and the new contribution limits are less restrictive.
It's available to most individuals up to the age of 75.
How Much can be Paid ?
An individual can in theory make unlimited contributions to a pesion scheme. However, tax relief will only be granted on payments up to 100% of earnings (or £3,600 if greater). So, in practice, payments are likely to be limited to this amount.
There is also an annual allowance which limits tax breaks on pensions, currently £215,000 (2006/07 tax year).
There will be taxation penalties if at the time of Death all pension funds (including the sum assured from this type of Policy) exceed a Lifetime Allowance. The Lifetime Allowance has initially been set at £1.5m (2006/07)
What is the Inheritance Tax (IHT) Position ?
Normally the payment of a lump sum from a pension scheme on death will be exempt from IHT. However, for these Policies there are two main exceptions :
- if death occurs within 2 years of a trust being set up
- where only the legal personal representatives are available to receive the benefit
What else do I need to be aware of ?
- Even though this is written under a pensions wrapper, there is no investment content saving for retirement.
- This contract may not necessarily be the cheapest of most appropriate policy for your needs.
- They can only be written on an own-life basis.
- Tax relief is not guaranteed and could be removed at any time by the Government
- The rates of tax may change and the net premiums may change as a result
- It does not usually offer as many additional 'bolt-ons' as a traditional Term Assurance Policy, such as Critical Illness