If you want to pay less tax – and who doesn’t? – there is a new way of reducing your overall bill. And it is also a way to get really cheap life insurance. But before you rub your eyes and try to wake up, read on as we investigate whether this is as good as it seems!
If you pay for life insurance cover at the same time as paying into a pension plan, you can use your pension contributions allowance to lower the cost of your life insurance. This works by offering a tax relief rate of 22% for those who pay the standard tax rate, and 40% for those who qualify for the higher rate of tax. Voilà, less tax, cheaper insurance!
You can sell pension to your provider will automatically reduce your combined life insurance and pension premium by 22%, but higher rate taxpayers will need to claim the balance on their self-assessment tax returns annually, to make sure they get the 40% rate they are entitled to.
By now, you may be bracing for the catch! Here are the three stipulations that your policies must take into account:
• Your life insurance and pension must come from the same company and must be paid as a combined premium.
• The total value of the two together must not be over £1.5 million.
• The premiums you pay annually for the combined pension and life insurance must not be more than £215,000.
So although there are certainly savings to be made, those for life insurance will not be as great as they might at first seem. The cost of a combined policy will usually be more than a stand-alone policy with the same company, and it’s unlikely that you will find the cheapest pension plan to fit your needs offered by the same firm that offers the cheapest life insurance. So your ability to shop around is reduced. Costs are further affected by the fact that to date, no online company offers combined life insurance/pension plans, so the usual online discounts will not be available.
So is it all a dream, after all? Not so. If you’re a higher rate taxpayer, the savings you make on tax will certainly make your life cover a lot cheaper! Standard taxpayers should always check online to see if the separate plans come to less than a combined pension and life insurance package.
There are a few other points to consider. Existing life policies cannot be converted into combined pension and life insurance deals. Tax relief is only given when the two are brought together at the same time. And combined policies can only be taken out for yourself – it isn’t possible at this time to take out a joint combined policy for you and a partner.
Another point to consider is that this kind of combined insurance deal cannot include critical illness cover. You can still take it out separately, and in fact, this is a good idea as critical illness insurance makes sure that if you are diagnosed with a specified serious illness, you will get a lump sum.
So if the perks of a combined policy have tempted you, consider carefully if you are thinking of cancelling an existing life policy. Since taking out that policy, the time has passed and naturally, you have aged! So your premium will be higher. And if you have developed any new medical conditions, they will be factored into the new premium cost too. Even a little weight gained with the passing years could adversely affect your premium costs. It may even be that a new provider will not offer you cover if your existing illnesses seem too serious. So you would be well advised to obtain written permission from your pension company, compare the cost after you apply the tax break, and see if you will actually save before committing to a new policy.