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John Lawson on pensions

In less than 18 months there will be a life cover revolution. New pension tax rules will allow most people to meet life assurance needs within a pension wrapper and get tax relief against the premiums paid.

It has been difficult to provide group life cover within a group personal pension (GPP) since tax rules changed on April 6, 2001. Before then, you could spend up to five per cent of earnings on personal pension death-in-service cover, but relievable premiums are now restricted to 10 per cent of your regular retirement savings amount. As savings towards retirement are typically variable, it would have been necessary to continually adjust the amount of life cover provided. This was practically difficult to do so group life cover in GPP (and group stakeholder) waned.

The 2001 changes resulted in a resurgence in the group occupational life cover market, where tax rules allow a lump sum on death of up to four times earnings. Many employers also provide a spouse’s pension in addition to the lump sum.

New rules will change the picture again. From April 2006, each employee can be insured for a lump sum of up to the lifetime allowance (£1.5m in 2006/07).

All group schemes should revisit their death-in-service arrangements. For GPP this will mean bringing post-April 2001 members in line with pre-April 2001 members. Occupational schemes may also reconsider offering a spouse’s death-in-service pension. Spouse’s pensions are treated as income in the hands of the widow(er) and are taxable. Insuring the spouse’s benefit as a lump sum, however, would ensure that the widow(er) received the whole amount tax free.

On personal life assurance taken out voluntarily, there are savings to be made using pension life cover rather than normal life assurance. Tax relief of 22 per cent is available on premiums paid by basic-rate taxpayers and 40 per cent to higher-rate taxpayers, .

Anyone can organise their life cover in this way, whether they have earnings or not, as they are allowed to pay £300 a month to a pension regardless of earnings, which would buy a large amount of cover.

If your employer offers more pension life cover through a flexible benefits package or salary sacrifice, you will also get national insurance (NI) relief.

‘Cheaper’ life cover is bound to stimulate requests to switch from normal to pensions life cover. IFAs would be wise to pencil life cover into their business plans for 2006/07 so that they don’t miss out.

John Lawson is marketing technical manager at Standard Life

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