Lump sums must be paid out through a discretionary trust. That gives trustees the power to decide when beneficiaries will be paid if a person dies, as regular payments are not possible.
In addition, relevant life plans only provide death benefits. Critical illness is not covered, unlike some life insurance policies. And beneficiaries are normally restricted to family members and dependents.
If you are self-employed or an equity partner, you will not qualify for relevant life cover.
What benefits do RLPs offer?
An RLP is a very cost-effective way for your clients – as long as they run businesses – to provide death-in-service benefits to their employees. They are tax-efficient for both employer and employee. Aside from that, the other main benefits are:
- The death benefit – including any terminal illness benefit – will not form part of the employee's pension lifetime allowance.
- Premiums paid by the employer will generally be treated as a business expense for tax purposes, as long as they satisfy the 'wholly and exclusively' test.
- Premiums paid by the employer are not treated as a taxable benefit or otherwise taxable on the employee (life assured), provided they are not paid under a salary sacrifice arrangement.
- The premiums paid do not form part of the employee's annual allowance – that is the amount that can be contributed by, or on behalf of, an individual to any registered pension scheme with the benefit of tax relief.
- Premiums are not assessable on the employer or employee for national insurance contribution purposes, provided they are not paid under a salary sacrifice arrangement.
- The benefits arise free of income tax.
- While the death benefit is payable through a discretionary trust generally it will be paid free of inheritance tax and will not form part of the employee's estate for IHT purposes.
Who might benefit from an RLP?
RLP is a tax-efficient way of providing life cover to company directors and employees who work for businesses that are too small to set up a group death-in-service scheme.
They can also be useful for higher earners who want more cover than their death-in-service benefits provide or those who have large pension funds.
An RLP will not be suitable if:
- The life to be insured is not an employee.
- It is intended to provide benefits beyond age 75 and beyond the period of employment.
- It is intended to provide benefits other than just: a) death before the age of 75, and b) ill health, disablement and death by accident while in service.
How can RLPs benefit those with large pension entitlements?
Where a death-in-service policy is written under pensions legislation, as is usually the case, lump sums paid out on death count towards the pension lifetime allowance. However, benefits paid under an RLP do not.
Let’s take the example of a high earner with a salary of £125,000 and death-in-service benefits of four times their salary – that is, £500,000. They could ultimately use almost half of their pensions lifetime allowance, which is currently £1,073,100 per individual.
Even if the benefit is split between several beneficiaries, the total death benefit still needs to be checked against the lifetime allowance.
Without prudent planning, beneficiaries may find themselves liable to a 55 per cent tax charge on lump sums and 25 per cent on income.
In most cases, RLPs are written under a discretionary trust. Any benefits fall into the trust and out of the estate for IHT purposes.
How much relevant life cover can clients have?
Many company directors pay themselves a low salary and higher dividends.
While there is no maximum statutory level of cover, HMRC have stipulated that the level of cover can be a multiple of total remuneration – that is, salary, dividends, bonuses and benefits in kind.
Providers have their own limits. And they usually state this as a multiple of income depending on age and set their own maximum cover limits. For example, one provider has limits of:
