Relevant Life Plans are an insurance against crises of many kinds – Birmingham Post article 21.05.2020

Covid 19 is not discriminatory – it is capable of taking out anyone.

And that can mean money troubles for the family left behind.

So at times like these a Relevant Life Plan (RLP) couldn’t be … well, more relevant.

It is in essence a life insurance scheme which allows firms to provide an individual death in service benefit for their employees – designed to pay a lump sum if the person passes on.

An important perk for the employee and tax efficient for the employer.

Relevant Life Plans can be particularly beneficial for small businesses that don’t have enough eligible employees to warrant a group life scheme.

They can also be attractive for company directors and high-earning key employees who have substantial pension funds and don’t want their benefits to form part of their lifetime allowance, £1,073,100 in the tax year 2020-21, above which there is a one-off charge of 25 per cent if paid as pension or 55 per cent if paid as a lump sum.

Unbiased, the organisation for independent financial advisers, states: “This means that for a higher-rate taxpayer, the company director can save 49 per cent, by paying for their personal life insurance via a relevant life plan. For a basic-rate taxpayer the saving is still significant at around 36 per cent.

“The majority of clients that seem to take out relevant life insurance tend to be IT contractors that contract through their own limited companies. Of course many other types of company directors can benefit such as tradesmen, business consultants, doctors or any one working through their own limited company.”

Web sites talk of £200,000 of cover from £2 a week but the figures have little meaning because there are so many variables, such as age, health, and the amount of cover taken out – usually 10-25 times remuneration.

It comes in at exactly the same as personal life cover – companies use the same rates.

So, it is important to shop around as rates vary significantly.

The website Employee Benefits offers the following example of how a RLP might work.

It states: “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.

“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 HMRC’s lifetime allowance limit.”

But with an RLP the death benefits do not form part of Gemma’s lifetime allowance so wouldn’t generate a tax charge.

For businesses, advantages are that they enjoy corporation tax relief (so long as the premiums are wholly and exclusively for the purposes of the business) and there are no National Insurance Contributions on the policy payments.

For employees, the family would expect a tax-free lump sum if the worst happened. Any claim is not subject to income tax, corporation tax or capital gains tax, and it should be possible to mitigate inheritance tax.

A word of caution however.

Relevant life plans are not available where there isn’t an employer-to-employee relationship. For example, sole traders, equity partners of a partnership or equity members of a Limited Liability Partnership.

They don’t have a cash-in value and if you stop paying your premiums your cover will stop.