Opening the door to Lifetime Allowance & Relevant Life
Opening the door to Lifetime Allowance & Relevant Life What we’re going to cover today… • Understanding the lifetime allowance • Lifetime allowance protections • Is there a market for Relevant Life Plans? • An introduction to relevant life plans • The Royal London solution • Bringing Relevant Life into your conversations
Opening the door to lifetime allowance & relevant life Learning objectives By the end of this session you should… • How the lifetime allowance works, what protection is available for it and how it works upon death. • The main features and benefits of a relevant life plan and how it could be an efficient form of life cover for those clients with a lifetime allowance issue. • How to identify opportunities to position relevant life as a viable protection solution for your clients.
Fiona Hanrahan – Pension Development and Technical Manager Lifetime Allowance Restricting tax relief
Lifetime Allowance Restricting tax relief Set the lifetime allowance…at £1.5 million… To provide certainty, pre-announce the lifetime allowance for all years up to 2010 such that it increases steadily to £1.8 million in 2010; Review the lifetime allowance level and indexation every 5 years, with the first review in 2010. “... broadly equivalent to the maximum pension allowable under the current occupational pensions regime…” Source: Budget 2004, Prudence for a purpose: A Britain of stability and strength, March 2004
Lifetime Allowance Restricting tax relief £m 2 1.5 1 “. .. so that everyone contributes their fair “... so that everyone contributes their fair 0.5 share to reducing the deficit…” share to reducing the deficit…” 0 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 Source: Royal London & Budget 2015
Lifetime Allowance Restricting tax relief Receipts 2013/14 2014/15 2015/16 2016/17 2017/18 £55m £82m £93m £144m £185m Individuals 2013/14 2014/15 2015/16 2016/17 2017/18 1,330 2,200 1,890 3,350 4,550 Source: gov.uk official statistics
Lifetime Allowance Restricting tax relief 13 Benefit Crystallisation Events (BCEs), most common are: Designating funds for Entitlement to scheme Increase to scheme pension in drawdown pension payment Purchase of a lifetime annuity Relevant lump sums 5 x death/age 75 Relevant lump sum death Prescribed authorised Transfer to QROPS benefits member payments
Lifetime Allowance Restricting tax relief • Defined Benefit (DB) schemes - 20 x the first year’s payment* + any lump sum • Drawdown pensions in payment at A-Day valued at first benefit crystallisation event post A-Day at 25 x max GAD • DB pensions at A-Day valued at first benefit crystallisation event post A-Day at 25 x current annual pension • Uncrystallised DC schemes valued against fund value * Schemes might have a different relevant valuation factor.
Lifetime Allowance On death • Uncrystallised DC funds valued against the fund value • Any DB pensions awarded on death are not tested • Benefits in drawdown not tested • Death in service cover valued at amount paid out
Lifetime Allowance Protection
Lifetime Allowance Restricting tax relief £m 2 1.5 1 Enhanced FP 2012 FP 2014 FP 2016 “. .. so that everyone contributes their fair 0.5 share to reducing the deficit…” IP 2014 IP 2016 Primary 0 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 Source : Royal London & Budget 2015
Lifetime Allowance Protection Fixed Protection 2016 Individual Protection 2016 • Keeps LTA at £1.25 million after • Must have pension savings of more than £1m 06/04/2016 at 05/04/2016 • Available to anyone who doesn’t have • Protects members LTA at pot level subject to Primary, Enhanced or Fixed 2012/2014 maximum of £1.25m • Lost if contributions made or further • Can continue with pension contributions accrual above the ‘relevant percentage’ • Unavailable in conjunction with Primary occurs Protection or IP 2014 • Can be held in conjunction with Individual Protection 2016
Lifetime Allowance Protection FP2016 suitable where: IP2016 suitable where: • Fund value likely to exceed LTA in future • Fund value is more than £1m on 5 April 2016 • Even without further contributions • Might want to make more payments • Employer only payments
Lifetime Allowance Options when Lifetime Allowance exceeded: Take all the excess as cash @ 55% LAC Take all the excess as income @ 25% LAC Don’t touch the excess yet – no immediate LAC Do nothing until LTA test forced
Lifetime Allowance Case study • Jim is 65 • His total pension savings amount to £1.5m • He has not crystallised anything so far • Jim has death in service cover of 8 times salary of £50,000 (£400,000) • Jim does not have any LTA protection What are Jim’s options?
Lifetime Allowance Take all the excess as cash @ 55% LAC £1.5m £1.0731m £426.9k £268.275k -55% PCLS £234.795k £192.105k £460.38k £804.825k Tax Free Taxed as income
Lifetime Allowance Take all the excess as income @ 25% LAC £1.5m £1.0731m £426.9k -25% £804.825k £106.725k £320.175k £268.275k £1.125m PCLS Taxed as income
Lifetime Allowance Don’t touch the excess yet No immediate LAC £1.5m £1.0731m £426.9k LTA test at next BCE or age 75 £268.275k Any growth increases LTA £804.825k PCLS charge Taxed as income
Lifetime Allowance Do nothing until LTA test forced £1.5m Tested at age 75 against full fund including any growth
Lifetime Allowance Options on death • Only apply on death before age 75 • Death after age 75 is not a BCE BCE 7 BCE 5C BCE 5D Relevant lump sum Drawdown for a Uncrystallised funds death benefits beneficiary used to buy an annuity
Lifetime Allowance Process on death • On death the provider does not deduct the charge and pass to HMRC • Full benefit paid out to beneficiaries • Up to personal representatives to establish if a charge is due and report to HMRC • HMRC then assess the individual
Lifetime Allowance Options on death • Only apply on death before age 75 • Death after age 75 is not a BCE • Remember no income tax on death before age 75 • Jim – remember excess of £426.9k BCE 7 BCE 5C BCE 5D 55% on £426.9k 25% on £426.9k 25% on £426.9k
Lifetime Allowance Options on death • Jim – remember excess of £426.9k • What about death in service? Remember 8 times salary • An additional £400,000 subject to the LTA charge • Jim would benefit from applying for protection • But what else could reduce the LTA charge? BCE 7 BCE 5C BCE 5D 55% on £426.9k 25% on £426.9k 25% on £426.9k 55% on £400k
Gregor Sked – Protection Development and Technical Manager An introduction to Relevant Life Plans
An introduction to Relevant Life Plans Let’s meet Jim Jim (47), Technical Director • Married to Jolene and have three children; Jeremy, Joseph and Jasmin • Employed at James’s Engineering Ltd. • James’ Engineering Ltd makes stainless steel marine bolts
An introduction to Relevant Life Plans Protecting the family What about Jim’s family? James Jane Jack Jim Managing Director Sales & Marketing Finance Director Technical Director Director H.M.S. JAMES’ ENGINEERING LTD.
An introduction to Relevant Life Plans Protecting the family Home Hobbies Holidays Lifestyle Second home Future proofing Children Liabilities What death-in-service options are available for the business?
An introduction to Relevant life Plans Registered group life schemes Disadvantages Advantages Company pays Not available for smaller companies No P11D charge Not available on single life basis Tax relief on premiums Can be inflexible Tax-free benefits under trust Often no continuation option Underwriting free cover Comes under pension scheme rules Group rates LTA trap for high earners
An introduction to Relevant Life Plans Relevant Life policies • Single life • Available for small companies • Not under pension scheme rules • Flexibility • Continuation options • Doesn’t affect the lifetime allowance Relevant life plans can save your clients • Generous tax treatment. up to 49% on their life cover
An introduction to Relevant Life Plans What are the restrictions? • Employees only • Benefits must provide a lump sum on death before age 75 • It can only provide life cover. No other benefits can be provided • No surrender value • Benefits payable through discretionary trust to dependants • Not to be set up for tax avoidance purpose • Don’t use for key person cover • Don’t use for share protection
An introduction to Relevant Life Plans How are the premiums tax efficient? • Premiums are paid by the employer • No P11D charge on the employee (S247 FA 04) • No National Insurance charge on employee or employer • Probable corporation tax relief on premiums (subject to wholly & exclusively rule) • Doesn’t form part of pension annual allowance • Doesn’t affect the lifetime allowance.
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