From April 2006 buying Pension Term Life Assurance (a form of Life Insurance) has got a lot cheaper. 22% cheaper for basic rate taxpayers and 40% for those in the higher band. Or to put it in figures -
- Term Life Assurance quote for a 40 year old non-smoking man
- At present he'd be paying around £12.50 (estimated) for £100,000 worth of cover
- With the tax-rebates this amount drops to £9.75 (lower rate tax band) or £7.50 (higher band)
- Total yearly saving of £33 if you pay tax at the lower band, £60 for higher rate taxpayers
Another way of approaching this is keep paying the same monthly premiums (as if the tax-rebate wasn’t available) and you’d get 22% or 40% more total cover.
What Is Term Assurance
Term Assurance is a form of life insurance that guarantees to pay out on the holders death (some restrictions apply like suicide) but only for the length of the term. For example, a 40 year old man with 2 children (aged around 10) may feel that his family only needs financial cover (should he die) until the children are grown up in their 20s.
Buying Term Assurance for say 15-20 years would offer his family some excellent financial protection. If he were to die within that time period the insurance policy would pay out, but if he died the day after the policy expired there would be no payment made to the family.
Note that Term Assurance is a simple insurance policy so always try to buy the cheapest available. You won't get a better 'quality' product by paying anything extra.
How Does The Tax Rebate Work
- Obviously the Insurance companies will handle the main paperwork
- The policy will be held within a pension wrapper
- This in turn enables one to get the tax-relief
- And some further good news is that you don't already have to own a pension or need to buy a pension to get the tax-relief
Buying this type of Assurance will be as simple but higher rate taxpayers will need to do a little bit more work.
- The 22% tax saving will automatically be rebated on every policy sold (that's held within a pension wrapper)
- But the extra 18% rebate for higher rate taxpayers must be claimed on your self-assessment form
Term Assurance & Your Total Pension Allowance
This is where things start to get tricky and you should receive professional advice if need be.
- From the 2006 tax-year the maximum amount that can be held within an individuals pension pot without suffering tax-penalties will be £1.5 million (this will be revised higher every year)
- Anything over this amount will suffer from a 55% tax surcharge
- So there's no point in taking advantage of the new tax-rebatable Term Assurance if it's going to increase your total pension pot over the £1.5 million allowance
Any Catches?
- Only basic life assurance is available so no policies such as Critical Illness or family benefit will be allowed
- There is a risk if you move from a 40% tax band job to a lower one the loss in tax relief could make the policy more expensive
- Also, when you die the payout from the assurance policy will be added to the total value of your pension fund and tax is levied at a disgraceful 55% of anything over £1.5million. This contrasts with standard life cover which isn’t treated or added to your total pension pot - High earners take not of this important point
Summary
The tax rebate is great news for those wanting to take out Term Assurance or those who already have some Assurance.
However, beneath the surface things get a whole lot more complicated. The worst move we think would be for someone to rush into taking out a policy or switching from a current policy to get a cheaper deal. Better to reply on some professional advice from an Independent Financial Advisor (IFA). However, if you don't fully understand the intricacies of life insurance we would advise the following -
- Understand the more research you do into the matter the better deal you’ll likely get, and
- Talk to at least 2, if not 3 IFAs before you choose to do business
Good luck in reducing your monthly Term Assurance premiums!
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