Let us suppose an organisation has selected a new marketing manager, Gemma. The HR and pensions department has the job of proposing her pension and benefits package, with a brief to maximise her pension contributions and benefits and provide her with £1 million of life cover paid for by the employer.
Key points about relevant life policies:
- A relevant life policy (RLP) provides life cover outside of the structure of a registered pension scheme.
- An RLP’s death benefits do not form part of an employee’s lifetime allowance, so does not trigger a tax charge.
- The premiums of an RLP do not form part of an employee’s annual allowance.
- An RLP is not subject to income tax or national insurance contributions as it is not treated as a taxable benefit in kind.
- An RLP policy must only provide life cover, and no other benefit such as income protection.
At first sight, this seems a tough call. The employer’s pension is a defined contribution (DC) scheme and Gemma has accumulated a fund of about £900,000. So if she died with life assurance from the normal pension group scheme paying out an extra £1 million, the total death benefits of £1.9 million would easily exceed HM Revenue and Customs’ (HMRC) £1.25 million lifetime allowance limit and the excess would be subject to a 55% special charge.
Gemma, who knows a thing or two about pensions, has made it clear this would not be a satisfactory outcome.
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The normal way to solve the problem would be to provide Gemma’s life cover through the pension scheme. But this could produce a high tax charge on death, and the cost of the insurance premiums would also eat into her annual allowance, currently £50,000, that can be contributed into a registered pension tax-efficiently.
Fortunately, there is a really good answer to the problem, and it is one that HR and pensions managers are using more and more: the relevant life policy (RLP), which has the key advantage of providing pension life cover without the drawbacks that Gemma is objecting to. This is because RLPs fall outside the structure and legislation that govern registered pension schemes.
Of course, most employees are well catered for under normal group pension scheme life cover. But for high-flyers like Gemma, an RLP has big advantages.
The death benefits do not form part of her lifetime allowance , so the policy can pay out much more than the £1.25 million, either on its own or in conjunction with the pension fund, without triggering a tax charge.
The premiums will not form part of the employee’s annual allowance, so the employee and/or the employer can make the maximum qualifying inputs into the registered pension scheme.
HMRC normally does not treat the employer’s premiums for the RLP as a taxable benefit in kind, so these are not subject to income tax or national insurance contributions.
Assuming the tax inspector agrees that the premiums are wholly and exclusively incurred for the purposes of the business, the employer should get corporation tax relief for them. This is not normally a problem.
But to benefit from these tax privileges, an RLP must satisfy certain conditions set out in the legislation. The policy can only provide life cover and cannot provide any other benefit, such as income protection or critical illness insurance. It can only pay out a lump sum if the employee dies in service before the age of 75. The policy cannot have a surrender value, so it must be a term assurance policy. The beneficiaries can only be individuals or charities, although there can be a trust arrangement. The main purpose of the policy must not be to avoid tax.
The legislation under which RLPs are given these tax privileges is defined in s393(4) of the Income Tax (Earnings and Pensions) Act 2003 as an excepted life policy as defined in s480 of the Income Tax (Trading and Other Income) Act 2005.
So Gemma’s employer can take out the RLP for her. She and the organisation will be able to build up the maximum benefits under the pension scheme without the life premiums eroding any allowances. Then, if she dies in service, the whole of her pension fund, subject to the lifetime allowance, can be paid out to her beneficiaries, along with the proceeds of the RLP. And the premiums for the policy carry the tax privileges of a pension life policy.
RLPs also make sense for other types of employee. For example, directors of smaller organisations may not have enough employees to set up a viable group life scheme, or there may be employees that want more aggregate life cover in a tax-efficient form than they can achieve under normal pension rules.
Danby Bloch is editorial director of Taxbriefs