Five things you might not know about relevant life plans

17 June 2020
When passionate entrepreneurs start to grow their business and hire more employees, what options do they have for insuring against the untimely death of an employee and offering some form of benefit to their family?

The average cost of a wedding cake is said to be around £3001, which if you’re like me sounds excessive for what’s essentially eggs, flour, sugar and milk. Then again, suggesting a Victoria sponge from a supermarket as a cheaper alternative probably won’t go down well with your partner.

But what’s a wedding cake got to do with relevant life plans I hear you ask? Well, like many people across the UK who’ve had to review their wedding plans due to COVID-19, it dawned on me just how many single-person enterprises or ‘micro-enterprises’ we’re relying on to make our big day run as smoothly as possible.

A recent government publication2 revealed there were around 5.9 million businesses in the UK at the beginning of 2019, with small to medium sized enterprises (SME’s) (0-249 employees) making up 99.9% of that number. Of the SME market, 99.3% are classed as ‘micro-enterprises’ (0-49 employees), much like the businesses that are involved in our wedding.

Because many group life insurers will ask for the business to have at least five employees before they would offer cover, it may not be an option that’s available to many ‘micro-enterprises’.

However, no matter how small your client’s business is, a relevant life plan (RLP) could be a way to offer them death-in-service benefits in a tax-efficient way.

Here are five things you might not know about relevant life plans.

1. They can move with the employee

Continuation options for relevant life plan’s give flexibility to employees wishing to remain covered after leaving their employer as they allow them to carry on the plan as personal cover. The individual’s new employer may even wish to continue the plan by picking up the premiums. Some providers may allow for the individual to request the cover to continue as a personal plan within 30 or 90 days of ceasing employment. However, there’s no limit to when an individual can ask Royal London to have their plan continue as personal cover. We even allow for Terminal Illness to be included within the continued cover.

2. Cover is typically calculated by multiples of salary

When calculating maximum cover amounts it’s common practice among protection providers for financial underwriting reasons to use the maximum multiples of salary, varying on the age of the insured. It includes salary, regular dividends paid in lieu of salary and any benefits-in-kind. And with Royal London, we don’t use salary multiples for cover up to £1m.

3. The life assured has control

Relevant Life Plans from Royal London are set-up under a discretionary trust, giving the life assured even more control by allowing them to appoint and remove trustees. This can be particularly useful if their employer has been appointed as a trustee and then the life assured subsequently leaves the business. A relevant life plan trust form must be completed so that the plan is under trust as soon as it starts. What’s more, you don’t have to wait for signatures from nominated trustees or your client as we have a signature free Relevant Life Plan trust process, meaning you can get your client’s plan on risk even quicker.

4. They can be a tax efficient solution

Relevant life plans can be a very tax efficient protection solution for several reasons:

  • The beneficiary doesn’t have to pay income tax on the benefits, nor are the benefits usually subject to inheritance tax (in exceptional cases there could be periodic and exit charges placed on the trust). And unlike the lump sums paid from a registered group scheme, the benefits paid from a relevant life plan don’t form part of an employee’s lifetime allowance for pension benefits.
  • Premiums paid by the employer may be treated as an allowable expense for the company when calculating tax liabilities (employer payments must qualify under the ‘wholly and exclusively’ rules).
  • The premium is not normally treated as a benefit-in-kind; therefore, the employee doesn’t have to pay Income Tax on it.
  • Premiums don’t count as contributions towards the pension annual allowance.
  • Neither the employee nor the employer will pay National Insurance on the premiums.

5. They may help identify a business protection need

How many of your clients run their own business? Do you talk to them about protection? While relevant life plans can’t be used for business protection due to the legislation that governs them. A conversation about protecting employees with a relevant life plan could be a great catalyst to identifying protection needs for their business loans, or against the loss of a key person or shareholding director.

So, why not consider reviewing your client bank to see if there are any ‘micro-enterprise’ entrepreneurs’ who could benefit from having a conversation about relevant life plans? And if you, like the rest of the nation have spent lockdown perfecting your baking skills, let me know if you’re considering moving into the wedding cake business.

If you’d like to learn more about the opportunities of bringing a relevant life plans into your protection conversations with a focus on those clients who have a lifetime allowance issue, why not watch our webinar looking at relevant life plans and the lifetime allowance.

Sources
1 - Money Advice Service – how much does an average wedding cost, June 2018.
2 - Business population estimates, Department for business, energy and industrial strategy, October 2019.

About the author

Gregor Sked

Protection Development and Technical Manager

Gregor’s exposure to financial services began back in 2011. Most of his early career was spent at Standard Life where he was a presenter in the workplace pension engagement team. He joined Royal London in 2018 to spend more time on protection in the Intermediary market. Gregor is involved in developing adviser facing content, presenting, writing articles and commenting for the press. Gregor is also studying towards a Diploma in Financial Planning through the CII. Even though he spends most weeks travelling the length and breadth of the UK for business, in his spare time he loves travelling the world and planning future adventures. He also loves cooking, running and when he’s not travelling can be found on the golf course patching up all the divots he’s made.

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.