“Pensions” – a new term in Life Insurance
By: Michael Challiner
Pension term assurance is a product which pension companies have introduced as a result of the April 2006 budget. This tax perk was hardly noticed at first, but the full implications are that millions of people can now gain from big savings on life insurance.
Your insurance premiums can now come from untaxed income, which can slash your costs by up to a third.
Prior to the new rules coming into force, the maximum amount which could be purchased was 10% of pension contributions. It is now possible to put virtually unlimited life cover into your pension. Even if you buy it as a stand-alone policy, it will still qualify for tax relief.
Basically, the company which you choose to supply your plan will claim the tax relief on the policy on your behalf. This means that you will pay only £78 per month to received £100 worth of insurance. Higher rate taxpayers benefit too, but the extra £18 per month will be claimed by on your self-assessment tax return. It’s simple to reclaim and means you’re only paying £60 per month for £100 worth of cover.
There are administration costs involved as far as the pension term assurance providers are concerned and this means that this method works out slightly more expensive than the cost of normal term insurance, but the tax breaks still make the plans appealing.
If you’ve already built up a substantial pension, there is something to be taken into account though. . This probably won’t worry too many people!
There is a lifetime limit on the fund. On the death of the policyholder, the final payout from the plan would be added to the total value of your pension fund. If this takes the total amount to over £1.5m, the 55% of the sum over this figure will go to the taxman. If your spouse survives you, then the sum could be used to purchase a pension of their own.
The policies are very simple and straightforward. They are based on basic life assurance and don’t include the extras which are often added to term insurance policies. They are designed to pay out a lump sum on the death of the insured. Most of the plans are based on individual cover although It is expected that joint life cover will be introduced in time.
There is something else that you need to be aware of. “Waiver of premiums” is something that is a benefit of conventional life cover. This means that if you become too ill to carry on working and cannot keep up the premiums, than your cover is protected. This has not generally been available with pension term assurance, although at least one company has now introduced it as an add-on without extra cost. It is worth checking out.
Tax relief certainly keeps the cost down and offers you more cover for less outlay. It’s not often you receive a gift from the Chancellor of the Exchequer and you know what they say about never looking a gift horse in the mouth!
The internet is the place to look if you want to find out more about these plans. Don’t look for individual companies as you’ll need to make comparisons. An on-line broker is there to do this for you – they’ll search the market and come up with the right plan for your individual circumstances as well as answering all your questions. That’s what they’re there for.
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