In this issue’s Tech Refresher, Technical Connection examines the merits of relevant life policies
Relevant life policies (RLPs) allow employers to provide employees (including directors) with tax-efficient death-in-service benefits. They can be particularly attractive for high-earning employees or directors who have substantial pension funds and who don’t want any death benefits to form part of their pension lifetime allowance (LTA).
The LTA is designed to limit the total pension savings an individual can accumulate tax efficiently. Accumulated benefits in excess of the LTA are taxed at rates that largely remove the tax benefits. Currently, the standard LTA is £1.073m but it is set to increase by consumer price inflation each year. However, people could have elected for a variety of LTA protections in the past, which will afford them a higher figure.
An individual’s benefits are tested against the appropriate LTA on each occasion when there is a benefit crystallisation event – normally when retirement benefits are taken, when the member dies or on reaching age 75.
An RLP is a term assurance policy that can only be effected by an employer on the life of an employee. It is funded by the employer. The primary purpose of an RLP is to provide a benefit on death before age 75, although other benefits in respect of ill health/disablement that lead to the individual being unable to work, and death by accident, may also be payable as long as the life assured is still in employment.
Generally, an RLP is suitable for those employers who, perhaps because of the smaller size of their business, do not wish to set up group arrangements for all their employees or wish to provide additional benefits to individual employees. An RLP is also suitable when the employer wishes to provide tax-efficient additional benefits on death or ill health in service.
The term ‘employee’ would include a director or officer of a company but does not include a partner in a partnership, a member of an LLP or a sole trader.
RLPs benefit from favourable tax treatment as compared to other employer-financed retirement benefit schemes and trust arrangements. However, to qualify as an RLP, certain conditions must be satisfied.
Where RLPs are appropriate, they can provide significant benefits. For example:
- Tax relief on the premiums for the employer subject to satisfying the ‘wholly and exclusively’ test.
- No assessment of premiums on the employee as benefits in kind, provided the premiums are not paid under a salary sacrifice arrangement.
- Premiums are not taken into account in determining the employee’s available annual allowance for registered pensions.
- No assessment for the purpose of National Insurance contributions, provided the premiums are not paid under a salary sacrifice arrangement.
- Benefits arise free of income tax.
- Benefits do not count towards the employee’s LTA.
- Death benefits are usually paid via a discretionary trust, so would normally arise free of inheritance tax.