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The Chancellor finally offers some great money saving news.
From April 2006 buying Pension Term Life Assurance (a form of Life Insurance) is going to get a lot cheaper, 22% cheaper for basic rate tax payers and 40% for those in the higher band. Or to put it in figures -
Rough estimate for a 40 year old non-smoking man
At present he'd be paying around £12.50 for £100,000 worth of cover
With the tax-rebates this amount drops to £9.75 (lower rate tax band) or £7.50 (higher band)
Total yearly saving of £33 or £60
One way of looking at the equation would be to keep paying the same monthly premiums but get 22% or 40% more total cover because of the tax relief.
What Is Term Assurance
Term Assurance is a form of life insurance that guarantees to pay out on the holders death (some restrictions apply like suicide) but only for the length of the term. For example, a 40 year old man with 2 children (aged around 10) may feel that his family only needs financial cover (should he die) until they are grown up in their 20s.
Buying Term Assurance for say 15-20 years would offer his family some excellent financial protection. If he were to die within that time period the insurance policy would pay out, but if he died the day after the policy expired there would be no payment made to the family. But then after the policy expired his family and in turn the financial situation would be a lot different -
The mortgage would either be paid off or a much smaller amount (15-20 years of payment would have been paid in)
The children would be in their mid 20s and be likely to fully support themselves
The breadwinner of any family dying in their 60s is not nearly as devastating as them dying in their 40s
Note that Term Assurance is a very simple insurance policy so always try and buy the cheapest available. You won't get a better 'quality' product by paying anything extra.
How Does The Tax Rebate Work
Obviously the Insurance companies will handle the main paperwork
Basically the policy will be held within a pension wrapper
This in turn enables one to get the tax-relief
And some further good news is that you don't already have to own a pension or need to buy a pension to get the tax-relief
Buying this type of Assurance will be as simple but higher rate tax-payers will need to do a little bit more work.
The 22% tax saving will automatically be rebated on every policy sold (that's held within a pension wrapper)
But the extra 18% rebate for higher rate tax payers must be claimed on your self assessment form
Term Assurance & Your Total Pension Allowance
This is where things start to get tricky and you should receive professional advice if need be.
From the 2006 tax-year the maximum amount that can be held within an individuals pension pot without suffering tax-penalties will be £1.5 million (this will be revised higher every year)
Anything over this amount will suffer from a greedy 55% tax surcharge
So there's no point in taking advantage of the new tax-rebateable Term Assurance if it's going to increase your total pension pot over the £1.5 million allowance
Any Catches?
Only basic life assurance is available so no policies such as Critical Illness or family benefit will be allowed
There is a risk if you move from a 40% tax band job to a lower one the loss in tax relief could make the policy more expensive
Also, when you die the payout from the assurance policy will be added to the total value of your pension fund and tax is levied at a disgraceful 55% of anything over £1.5million, standard life cover is not treated or added to your total pension pot - High earners take not of this important point
Summary
The tax rebate is great news for those wanting to take out Term Assurance or those who already have some Assurance. However, beneath the surface things get a whole lot more complicated. The worst move in our opinion would be for someone to rush into taking out a policy or switching from a current policy to get a cheaper deal. Better to reply on some professional advice from an Independent Financial Advisor (IFA). However, if you don't fully understand the intricacies of life insurance we would advise the following -
Realise that the more information you know and understand about a financial product the better deal you'll get
Talk to at least 2, if not 3 IFAs before you choose to do business
Good luck in reducing your monthly Term Assurance premiums!
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