What’s on advisers' minds?

Hi everybody, and welcome to this webinar from Royal London. I'm Gregor Sked, and today I'm joined by my colleague, Craig Muir, and we're part of the Technical Marketing team here at Royal London. So, a huge thank you all for joining us today. Now what's on adviser's minds? That's our topic for today, and what we're going to be looking at are some of the key questions that advisers are asking us right now about pensions and protection. Now, before we go into the content today, just a few housekeeping rules. So, if you are watching this as a live webinar, then you'll be able to raise questions using the chat facility down the right-hand side of your screen, and we'll get back to you with an answer as soon as we possibly can. Alternatively, you can raise your question with your usual Royal London contact, if you prefer. Now, if you are watching this as a recording after today's session, then the chat facility, of course, won't be available. You will only have the option to raise your question with your usual Royal London contact. With regards to your CPD certificate, you will need to answer some questions after the webinar, and this will automatically generate your certificate. So, between myself and Craig, we're going to look at some of the common questions that have been coming into our technical team as well as our sales teams.

So, from a pensions perspective, what are we going to look at? Well, we're going to talk a little bit about some of the questions that were asked on the back of our January webinar, and we're going to be covering that, particularly around the theme of pensions with IHT, again, a lot of which will be dependent on the outcome of the consultation, which we should hopefully see around the summertime. Craig's also going to take a look at salary exchange, and some carry forward related questions too. From a protection perspective, we're going to take a look at some of the common questions that we've been seeing with regards to income protection, as well as trusts, and also look at how last year's budget has really ramped up the need for protection advice.

Now, as always, we like to make sure that we can provide you with those valuable CPD credits. That does mean we need to have some learning objectives. Now for today's session, our learning objectives are as follows: So they are firstly to have an understanding of the rules on making multiple claims on income protection contracts, have a better awareness of the benefits and considerations of assigning joint life policies to trust, know where some people make mistakes when working through carry forward calculations and how to prepare so that you don't make the same mistakes, identify employers' key concerns when it comes to implementing salary exchange, be able to explain the role of insurance and protecting potentially exempt transfers, and lastly, being able to explain some of the intergenerational tax planning opportunities. So, a lot to get through.

But let's start with our first question, and a common one with regards to income protection, and that's, can multiple claims be made on an income protection contract? Well, it's a really interesting question, one that, as I said, we've been getting quite a lot but to answer, I'm going to actually take a look at how it works for the main types of protection products available on the market. So, we've got Life Assurance, we've got critical illness cover, and, of course, income protection. So, let's start with Life Assurance. Probably the product that most of us on the call today will be very familiar with. Life Assurance pays out on the death or terminal illness of the life assured. Generally, it only pays out once. However, there are some variations of this product on the market, such as your family income benefit policies, which pay a monthly income rather than a lump sum. Aside from that variation, it generally will pay out once. What about critical illness? Well, a common misconception with critical illness cover is like life cover – it pays out once. Actually, in fact, many critical illness contracts these days offer partial payments. So, a partial payment for a diagnosis of often a less serious condition, while still allowing that the Life Assured, plan owner, to make a claim for the full amount of cover, should these later be diagnosed with a potentially more serious condition.

Now, a relative newcomer in the protection space with critical illness coverage is with children's critical illness cover, something that we're seeing a lot of advisers having more conversations. With regards to now where children's critical illness cover is included within a plan that also allows for another claim to be made, often without adults’ cover being impacted.
Now, lastly, we've got income protection. Now, in theory, if the premium is paid, the contract remains in force, but actually, to determine the number of claims that could be made, there's a couple of things to be aware of now. The first and key thing is the type of income protection contract that is being arranged. If it's a long-term contract, a long-term policy, the customer is going to receive money from a successful claim for the entire period of time that they're off work sick, or until the policy comes to an end, or they return back to work, or they die. If it's a limited term policy or a short-term policy, then the customer is going to receive the money from a successful claim for a limited amount of time. It's typically anywhere between one and five years. So, in essence, multiple claims can be made on an income protection contract. But there is also something else to be aware of, and that's with regards to connected and unconnected claims. And we're going to take a look at a couple of examples just to bring that to life.

Now, before we look at our example, just in the context of income protection, what I mean when I talk about connected and unconnected claims really refers to whether a new claim is going to be linked to a previous claim for any for any payments. This distinction really affects how insurers assess new claims, also the deferred period, and whether the maximum benefit payment period has to be reset. We'll touch on what that means very shortly. Now a connected claim, that occurs typically when a policyholder claims for the same or often a related medical condition within a specific period after returning to work. So, if the new claim arises for the same medical issue again or a close related issue, it's considered connected. Now most policies do specify a time frame within which a reoccurrence of the condition is deemed to be connected. It can vary often between six months maybe even 12 months. If a claim is connected, then the insurers usually don't require the policyholder to wait for their deferred period to end before the benefits resume. And if the policy is a limited term policy, so remember, those short-term policies, a connected claim doesn't always reset the clock now that previous benefit duration would often count towards the total limit. And we'll explain all this as we go through the example. Now, just lastly, with regards to unconnected claims, so when an unconnected claim occurs, that's regards to a completely different medical condition, or maybe when the reoccurrence of that condition happens out with the linked claims period.

So why does this all matter? Well, actually, if we understand these differences, so connected and unconnected can really help understand how the policies work with different insurers, because different insurers often define connected and unconnected quite differently. Clients also can sometimes wrongly assume that they're going to be paid immediately for any reoccurring claims, but actually, if a claim is unconnected, they might have to wait for the deferred period again, and also for those limited term income prediction policies. So connected claims do reduce the overall available claim duration that's left, and it's really important that we clarify this to clients, but let's look at an example to really bring this to life, and we'll talk about what we're just referred to with this example. So here we've got Kate. Kate has a short-term income protection contract, or limited term income contract, and it has a five-year payment period, so if she's unable to work she makes a successful claim on her policy, then she could have five years’ worth of payments. Again, assuming she's off work sick for that time. Now, Kate's diagnosed with a muscular skeletal condition, so that means she has to stop working before her policy pays out. She needs to wait for that deferred period to come to an end, and in this case, the deferred period that's been selected is 13 weeks or three months. Now, actually, we can see that Kate is off work sick for a total of two years and three months, and she receives a total of two years’ worth of income protection payment over that time, those three months being the deferred period. After two years and three months off work, Kate returns back to employment. So, Kate returns back to work, however, two months later, she suffers a relapse of her musculoskeletal problem. She's already used up that two-year worth of potential claims from that five-year payment period, meaning she's got a further three years’ worth of claim available if necessary. Now, it is common on income protection contracts to often see a clause were returning back to work, and unfortunately, needing to make another claim on that contract, again, as I said earlier, often within a 52-week period since the first case of incapacity, that might mean that that deferred period is waived.

So, where you've got a policy that has full cover, then there's no period that you've got to be back at work in order to have that connected claim. If the claim is for the same reason, and if it's within 12 months, from a Royal London perspective, stopping paying the first time, that is what we would class as a connected claim. And therefore, no deferred period applies. So, we start paying that straight away. In this scenario here, so let's say Kate had claimed for a full five years, she recovers from her condition and returns back to work. If she returned back to work for a period of six months or more having made a previous claim, assuming that she's used up that five year bucket on the left hand side, as long as Kate returns back to work for a period of six months or more, that bucket effectively reset so she could actually make another claim, which she would pay and can protect. We'd be able to pay income protection benefit upon a successful claim for a further five years, and that could be for the same condition as before or a new condition, but remember, in this scenario, the deferred period would apply. So just a little feature to be aware of when it comes to income protection, a real common question that we're getting.

Now, moving on to our second common question that we've been getting a lot from advisers, and that's with regards to Joint Life policies. Should Joint Life policies be assigned to trust? So big question is, should you ever consider writing a Joint Life policy into trust? Is it even possible? And if so, what are the benefits of doing so? Well, let's just familiarise ourselves with why we assign policies to trust to begin with. Because in doing so, by assigning a policy to trust, we're typically hoping for three good outcomes to happen, right hands, right time, right money. So, by right hands, we're here, ultimately giving the person that's putting the policy into trust to sign that policy into trust, the control that the policy proceeds will go to the people that they want it to go to if a claim happens. From a right time perspective, so claims on policies that are written into trust will not require the production of a grant of probate for England, Wales, Northern Ireland, or a certificate of confirmation up here in Scotland, as part of the claims process. And from a right money perspective, so claim proceeds where a policy has been assigned into trust won't be subject to inheritance tax, because that policy that's in trust is removed from the donor's estate.

Now you might think that those are three reasons why it doesn't actually make sense to put a joint life policy into trust. So, let's just look at another example to try and illustrate this a little bit further. And in particular, what might happen with claims specific to a joint life policy. So here we've got a couple of clients. We've got Craig and Gemma. They're married. They've got a joint life first death policy. It is not currently assigned to trust. So, the policy would pay out on whoever died first. So firstly, what would happen if Craig died, and Gemma needed to make a claim? Well, in this scenario, Gemma can claim the full sum assured, the claim proceeds shouldn't cause an IHT concern on the first death, so we can say that we've achieved that right money objective. Gemma would also then receive the claim proceeds, so we can say that we've achieved the right hands objective. And lastly, because we don't need to see a grant probate or confirmation on a joint life policy claim, there shouldn't be any delays in Gemma getting the proceeds again, we could say that we've achieved the right time objective. At face value, it might look like three good reasons not to write a joint life policy into trust. However, there is another situation that we need to consider. What would happen with the policy proceeds from the life policy if both life's assured died at the same time or within a short space of time of each other, because actually, it's very likely that the intention was for the proceeds off the policy to benefit each other. But are there any other provisions beyond that? Well, we know that if Craig died, but Gemma survives, Gemma can claim the proceeds quickly, but if they both die, the life company would require a grant to probate or certificate of confirmation on the second death as part of the claims process. And if they die together, well, it's often deemed that the youngest would have died, died second.

Now, there are probably no IHT concerns on first death for a married couple, but the second death life policy would mean it's included within their estate, and it would be included in the calculation to value their estates. So that simply means that the inclusion of that life policy, some assured could add to it, could even create an inheritance tax charge. Now there are trusts that are specifically designed for joint life first death policies. These are generally discretionary trusts, but they have a special survivorship clause, often known as 30-day wording. So, in this scenario, let's say Craig and Gemma are involved in a road traffic accident. Craig died at the scene. Gemma survives, but she's in a critical condition. The test to determine what happens next is whether Gemma survives. So, she survives by 30 days following the death of Craig, under the terms of this type of trust, Gemma will become absolutely entitled to the plan proceeds. And that makes sense, isn't it, because if Gemma is alive, she'll presumably need to fund herself, fund their lifestyle. The definition of dying at the same time on trust with the survivorship clause is typically 30 days across most live offices. At that 30-day point, Gemma becomes the beneficiary of the plan proceeds. Now, if we revisit that last scenario, now the policy's assigned to trust, let's imagine that Gemma doesn't make it and actually dies a few days after Craig. If she dies within 30 days following the death of Craig, the plan proceeds under this type of trust are held in trust for their chosen beneficiaries. They won't enter the estate, won't form part of any IHT calculation, and it means, by using this type of trust, we can achieve two possible outcomes. If one life issuer dies, but the other survives, the survivor can benefit from the planned proceeds and are held absolutely for them. But if they both die within a period of 30 days of each other, the proceeds are held in trust and out with the estate, so that, again, means the estate won't be inflated by the sum assured of that policy, shouldn't be any delays in the proceeds being paid, and the trustees can make sure that the payment goes to the correct beneficiaries, as per Craig and Gemma's wishes.

Now it's also really important to remember about cohabiting couples, just very briefly. Now ONS reports that have been recently suggest that the number of couples living together, not married or in the civil partnership, is on the rise. If a couple own a plan jointly and it's not assigned to trust, on the first death, ownership automatically passes to the survivor, but from an IHD perspective, the deceased share is in their estate as a gift to the other, which isn't covered by this spousal exemption, which is just something to be aware of. So Craig, we've covered a couple of questions there relating to protection. Would you want to share a couple of pensions-related questions with us?
Thanks, Gregor. As Gregor said in the introduction, in last month's webinar, we looked at carry forward and as a result, we've been asked a number of questions by advisers about where people go wrong with their carry forward calculation. So, we're going to look at this next. So where do they actually go wrong? Now the list on the screen, it covers most of these, and it's roughly in an order of most to least common, so most on the left-hand side to least common on the right-hand side. And just to let you know, this is actually based on our technical team checking hundreds and hundreds of carry forward calculations. So first up getting mixed up between annual allowance and tax relief, and this is by far the most common mistake. You know, when you're using carry forward, you're working out the unused annual allowance, not the unused tax relief. So, it's important to remember that for an individual contribution, the client will still need earnings in the year of payment to support the contribution. For example, if there's £100,000 worth of unused annual allowance, the client will need earnings of at least this in order to make an individual contribution of that level, and of course, receive tax relief. Now, often we've been asked to work out someone's available annual allowance, and then we find out they don't have the earnings to support the contribution. So, it’s a very good starting point is to establish the type of contribution, first of all, as well as the level of earnings. We'll talk more about the preparation in the next slide though.

The second one there is not dealing with the tapered annual allowance properly and the calculation now tapered annual allowance rules apply from tax year 2016/17 onwards. So, in theory, could apply to all four tax years in the carry forward calculation you're carrying out. Now, if the taper does apply, you know, either in the current year or an earlier year, carry forward can still be used. The standard annual allowance is simply substituted by the tapered annual loans for each year that applies.
The third one there is impact of the money purchase on your loan. Now, unfortunately, if you've triggered the MPAA, it's not possible to increase your contributions to money purchase schemes above £10,000 without that tax charge applying. So, you know, any carry forward would only be able to be used for any DB pension input amounts. And of course, once you've triggered the money purchase annual allowance, it applies for life, or I suppose, until legislation changes. So, your defined contribution or money purchase contributions will be limited to £10,000 before that tax charge applies. Now, even if you pay less than £10,000 one year to a defined contribution or money purchase scheme, it's not possible to carry forward any unused annual allowance to a future year.

The fourth one there is about getting confused about the eligibility for carry forward. Now, anyone who was a member of a pension scheme in the year they're carrying forward from is eligible to use carry forward in the current year. It's not necessary to make contributions using carry forward to the current scheme. You know, it can be made to a brand-new scheme or any other available scheme. And that definition of member is really broad for this purpose. Really the only people not eligible for carry forward are those taking out a pension for the very first time, as they won't meet any of the definitions of member for carry forward purposes. And one point worth mentioning here is that even if individuals have lived abroad during the previous three years, they could still meet the definition of member for carry forward purposes and be able to make contributions and use carry forward if they're back in the UK with pensionable earnings. And also, just something to watch out for, it'd be quite common for business owners not to pay in pensions in the early years of their business, and if they've never been an employee, they will never have been opted into a scheme. Now this is worth checking out, because if someone therefore anticipates using carry forward in the future, it would make sense to obviously think about setting up a pension plan sooner rather than later.

Employer contributions next. Now, when it comes to the annual allowance and therefore carry forward, all contributions, whether they're individual, third party, or employer contributions, they all count towards the annual allowance limit. It's not just individual contributions, which could potentially attract an annual allowance tax charge. A large employer contribution could mean an annual allowance tax charge for the client, and it's quite common to get confused around this point. You know, for example, although you don't need earnings to support an employer contribution like you do with an individual contribution, employer contributions still count towards that annual allowance. Next one is try and calculate DB pension input amounts yourself. Now when working out the available annual allowance for a DB scheme, it's important to obtain a history of pension input amounts from that scheme. The calculation of the pension input amount can be complicated, and of course, different schemes will have different ways of calculating pensionable service and pensionable salary, so absolutely not recommended to take this calculation on yourself.

And the final one there is previous carry forward contributions. Now I'm sure you're aware of this, one of the rules around carry forward is that you maximise your current year first before going back to your earliest of three years, and then you work forwards from there. So, if you receive a history of contributions for a client and they've paid in more than the annual allowance, or I suppose, their reduced annual loans due to the taper, for a pension input period or tax year, then you know for that year, they'll have no annual allowance left to carry forward. Now this makes looking back on previous calculations easier, as you can just put a line through that year. You don't need to work out the maximum they could have paid in that year using carry forward to find out if anything remains.

So what can you do to make sure you don't make these mistakes yourselves? Well, I suppose it makes sense to have all the information in front of you before you start. Now, it seems obvious, but you know what, we see lots of calculations where more information is required. A quick check about the eligibility for carry forward makes sense. Remember, it's really on people taking out a pension for the very first time that wouldn't be eligible. And then before charging on and working out someone's unused annual allowance, it also makes sense to check what contribution they can support, or whether it's an individual or an employer contribution, because we've seen lots of calculations done for individual contributions where the earnings are only, say, £30,000 and carry forward is therefore not relevant. So, obtaining the current earnings lets you check this and knowing total income will help you establish if the taper is an issue for the client. If the taper is an issue, then historic total income figures might be needed too for the previous three years. A contribution history is obviously essential for all contributions in the current and the previous three years, and remember that should include individual third party and employer contributions. And it also makes sense to assume that any regulars will continue as well. Now, if there had been a previous carry forward exercise done one of those previous three years, then you would likely want to know the history for the three years prior to that to establish if the calculation was done correctly. Remember, in a year where there has been a contribution above the available annual allowance, you know there'll be nothing left to carry forward for that year. That's because you maximise the current year first before going back to the earliest of your three years. I would always suggest using a table, something similar to what I'm going to show you in our case study in a minute, because that will just keep you on the right track and make sure you don't miss anything out.
Now this is a case study, it comes from our carry forward case studies document, which we have on the technical central part of our adviser hub. So, if you want to look at these, then you'll find it there. We've got lots more examples in the document for you to look at if you need more help, and they all use the suggested table I mentioned. So first up, let's meet Sam. So, Sam has his own limited liability company. This year, he pays himself a salary of £10,000 and also dividends of £100,000. Now, he took out a personal pension on the first of August 2012. It's been paying in £1,200 per month in employer contributions ever since. He has no other retirement savings, and he wants to make a substantial single contribution. Now before we start, then, right away, we see Sam has his own limited liability company, so he could, in theory, be looking at either employer or individual contributions. But we can see salary is only £10,000, so any individual contributions will be limited to £10,000. Now assuming he has no other income, the taper is not an issue, and he hasn't triggered the money purchase annual allowance. We know he's eligible to use carry forward because he's had that PP since 2012, and we know his contribution history. Now by looking at a carry forward exercise for Sam, then we could work out how much he could pay or have paid in on his behalf into a pension without a tax charge applying. Remember, this is separate from tax relief.

So here we have it, then our nicely laid out table we've done our preparation. We have the pension input periods of tax years. We have these total annual allowances, total contributions, for each year, and we've assumed these regulars continue. We've also got these unused annual allowance for each year, and this is totalled up at the end. There were no previous carry forward exercises done for Sam. So, we're just trying to make this a bit more straightforward in this example. So, Sam then has unused annual allowance of £142,400. Now, that's the maximum which can be paid without a tax charge applying. As we said, Sam can only pay in £10,000 as an individual contribution and receive tax relief. So, the remainder, or the total amount, would need to be paid as an employer contribution if he were wanting to pay in the maximum he could without a tax charge applying. Now this contribution would receive corporation tax relief. Well, that's assuming the wholly and exclusively conditions are met.

Now, at Royal London, we've got lots of help to support your carry forward calculations. Again, that technical central part contains all the technical information you would expect to help you with the calculations, as well as the document, which includes the blank table I used, and it's also got further case study examples. So that's on the Royal London adviser hub. Our CPD hub has presentations covering tax year-end tax relief and annual allowance, as well as carry forward. So, it's very useful if you want to brush up your knowledge on carry forward and obviously earn valuable CPD at the same time. And then finally, your normal Royal London contact will be able to help you with any queries, too.

Another topic which we touched on in last month's webinar, but we've had a number of questions as a result. Obviously, as it's written on the screen, we're talking about salary exchange here. But before I do, I just want to touch on some employer research Royal London did, and it was immediately after the budget in October 2024. So Royal London's customer insight function, they did some research to see what customers, advisers and employers said will impact them most as a result of the October budget, and also what actions they're likely to take. Now I'm just going to focus on the employer research and the impact of changes to their National Insurance. Having said that, I do want to highlight that in our research there was a real concern about IHT on pensions for family run businesses. And Gregor will talk a bit more about that later in the session, because it's worth thinking about raising awareness of protection products. So, you know, whole of life and joint life second and death, for example, to aid with tax mitigation, particularly for these family-owned businesses as clearly, they're on the lookout for some advice.

But getting back to our main subject, you know, and we're going to examine the actual changes in a couple of minutes, but employers told us the impact of the increase in employer National Insurance will lead to concerns about the increase in employment costs. In fact, one medium sized employer stated there'd be a 10% increase in their employment costs. There were some concerns about the impact on business growth and unexpected reduction in profits. And then when we asked them what actions that we're going to take as a result, we were told, employers will be looking to reduce direct costs from employment, which may involve things like recruitment freezes or redundancies. And alongside this, they said reviewing where there may be opportunities for tax savings will be important. Some employers said they may look to review plans for growth or expansion as the increased cost they face may no longer make it viable, particularly for smaller businesses. And ultimately, we were told in some cases, the increased costs for businesses on the back of the budget may result in these costs being passed on to consumers. And salary exchange was mentioned by some employers to help maximise tax efficiency, and we'll talk more about that shortly.

Now, we covered the changes to employer National Insurance rates in January's webinar, the budget update tax year and planning presentation, which is available in that CPD part of our adviser web. And we also looked at a case study using carry forward to help mitigate employers' additional costs. So, I don't want to cover this up again. I just want to highlight the potential problem for employers again, and that's that their National Insurance rate will increase from 13.8% to 15% from April 2025. In addition, the threshold at which employers need to begin paying National Insurance contributions will decrease from the current point of £9,100 to £5,000. Now that alone means additional employer insurance of £615 per employee, per annum. Of course, we mustn't forget to change the employment allowance now that's the level of National Insurance that employers have a liability for before they don't have to pay. Now, prior to the October 2024 budget, this was only available to employers whose total NI bill was below £100,000, and if that was the case, they wouldn't have to pay the first £5,000 of the National Insurance they would otherwise have been liable for. However, from 6th of April 2025 the employment allowance will increase from £5,000 to £10,500, and will be available to all eligible employers. So that means that it will now be available to employers with a National Insurance bill over £100,000. What all this means is employers are looking at ways to help manage potential additional costs, and in particular, you can explain to these employers how salary exchange can help mitigate some of these costs. The advisers have been telling us that some employers are still reticent to consider salary exchange, and they've got several misconceptions about it, so they've asked us if we can provide some practical suggestions on the implementation of salary exchange.

Just a quick reminder here, I don't know about you, but as I work in pensions, when I hear the word salary exchange, I actually automatically think of pension contributions, and I have to remind myself that salary exchange isn't limited to just pensions. There is a limited number of instances for salary exchange benefits are tax and National Insurance exempt these days, and they are payments into pension schemes, employer provided pensions advice, workplace nurseries. There's childcare vouchers and directly contracted employer provided childcare. But that had that started on or before the fourth of October 2018, and then the final one there is bicycles, and also cycling safety equipment, including cycle to work schemes. But I thought it'd be useful to cover some of the common objections you might get from employers about setting up salary exchange. Incidentally, we received this information from advisers, EBCs, and also implementation managers who help employers set up pension schemes with Royal London, they've got lots of experience dealing with salary exchange. Now, the first objection from employers is that their payroll system can't do salary exchange. The reality is virtually all payroll software packages have functionality to accommodate pension salary exchange. Now it's really important to explain to the employer that they need to check with their payroll provider to see if they can accommodate flexibility with salary exchange, because you may find that the payroll provider will only offer an all or nothing when it comes to the employer rebating their National Insurance contribution. So, you know, either 100% can be rebated or nothing can be rebated, and the employer keeps all the saving. However, some will allow for further flexibility, such as the employer giving up, say, 25% or 50% of the rebate, but some only offer this as a bolt on where the employer may need to pay an additional monthly fee, or perhaps a one-off fee.

Next up, some employers think they need to contact HMRC before they can introduce salary exchange. But in fact, HMRC guidance supports the introduction of pension salary exchange, and they don't require employers introducing such arrangements to approach them for clearance. Next is the perceived length of time it takes to implement. Now, most clients think it's a really long winded, onerous task to implement it, and therefore they might shy away from it. They do need to allow 30 days consultation period with employees. From our experience, some larger firms will allow for 60 to 90 days. But you know, the solicitor involved will be able to advise on this. It doesn't mean you need to wait 30 to 90 days to start the salary exchange, as you can be preparing other parts of the process during the consultation period. Now, historically the implementation of pension salary sacrifice or salary exchange, I should say, often saw businesses seeking consent from employees. However, it's now more commonly implemented through negative affirmation, which speeds up the process and it increases take up, often to around 95%. And of course, current arrangements may also benefit from adopting this approach to maximise the take up by new joiners, and also the next enrolment window for current pension member employees. And finally, some employers think you need consent from all employees before setting up salary exchange. But the reality is, not all employees need to be in the salary exchange scheme.

Now moving on to look at some considerations for employers. Firstly, tell employers to take their time introducing salary exchange. You know, try not to rush the implementation, because, from our experience, you might find that some employees may want to increase their pension contributions when they understand the benefit. Make sure the employer engages their employees. Employers definitely shouldn't say salary sacrifice, as I did a minute ago, as immediately this can get their backs up and they'll question, why am I, or why is my employer sacrificing my salary? You know, its name has changed to salary exchange for this very reason, because salary sacrifice sounded negative.

Make sure the employer writes out to employees to make it more personal, suggest to the employer to arrange for them to produce a statement of remuneration for your banks and building societies, etc, because that can help overcome concerns about their capacity to secure loans and mortgages. Now there will be ongoing administration once a salary exchange has been implemented, so just make sure that the employers are aware of this. For example, an annual increase or annual bonuses, if they're included in pensionable pay, there will need to be a recalculation once a year. But also highlight, if they've got some employees with variable income, perhaps it's salespeople who have an element of commission-based pay each month, that recalculation will be needed to be repeated every month, because payroll software is unable to cope with this. Therefore, you know they either need to factor in the additional admin each month, or perhaps, they could change the structure of the pay, or perhaps they could change to pension contributions based on basic pay, for example.

Now we highlighted this one in the previous slide. But just to reiterate, one other consideration for employers is if they reinvest any of their National Insurance savings, this is straightforward, and most payroll software can do this. However, if the reinvestment of National Insurance savings for employees can prove problematic, if their pay varies each month, as again, the payroll software can't cope with this. Again, moving to contributions based on basic pay could overcome this. Finally, here are some tips you can share with employers when they're rolling out salary exchange to their employees. Such as, communicating the benefits of salary exchange to employees is crucial to ensure that employees understand and appreciate the advantages of the arrangement. So, some effective strategies to communicate these benefits are, getting clear and concise communication. Make sure employers use simple, straightforward language to explain what salary exchange is and how it works. Ask them to avoid jargon and technical terms that might confuse employees and also provide examples to illustrate the benefits. By talking about that, they should highlight the financial benefits. Emphasise the financial advantages of salary exchange, such as, the savings on National Insurance contributions for both the employee and the employer. Explain how these savings can be redirected into the employee's pension pot, increasing the retirement savings. Emphasise the long-term benefits of salary exchange, such as increased pension savings and improved financial security in retirement. Explain how these benefits can contribute to their overall financial well-being. And they could use visual aids. And you'll utilise visual aids such as charts and graphs and calculators to show the impact of salary exchange on employees take home pay and pension contributions. Provide personalised examples, based on the employee salaries and their pension contributions and that that can help employees see the direct impact on their own finances.

Then address common questions and concerns. Be prepared to answer these common questions and address concerns employees might have about salary exchange. For example, explain how salary exchange might affect their ability to borrow or their entitlement to statutory benefits, although that remuneration statement could overcome that problem. Make sure they create an open environment where employees feel comfortable asking questions and providing feedback, because that can really help address any concerns. Ensure that you know employees fully understand the benefits of salary exchange. You provide opportunities for employees to have one on one meetings with HR or financial advisers to discuss their specific situations and how salary exchange can benefit them, because that personalised approach can help address individual concerns and build trust. Then using multiple communication channels to communicate the benefits of salary exchange through channels such as emails, team meetings, webinars, internal newsletters, because that ensures that the message reaches all the employees and reinforces the information. By using these strategies, businesses can effectively communicate the benefits of salary exchange to their employees, helping them understand and appreciate the advantages of this arrangement. I'm now going to pass you back over to Gregor for the next section.

Thanks, Craig. Something you touched on there was around October's budget, and it's probably no surprise that last October's budget has really raised the number of questions that we've been getting with regards to some of those proposed IHT changes and the impact that it could have on clients, but more so, what is the opportunity for protection policies? And how can protection policies help customers that are either maybe in that point in time where they're thinking about potential IHT issues that they could face? So why is it essential to consider protection advice alongside your IHT planning discussions. Well, first, I think rising property values wealth accumulation is certainly pushing more estates into and above the IHC threshold. And I think we're now seeing more families finding themselves in the position that they need to and want to start considering different solutions that can help mitigate their tax exposure and ultimately make sure that their wealth is passed on effectively. And remember that advisers like yourselves have got access to a breadth of different tools to help persist you in providing your clients with both the most appropriate and also quality advice for their situation. I put some of those common solutions on screen just now, whether it's joint life second death, trusts, as we looked at earlier, whole of life policies, or even gifting and Gifting Inter Vivos policies, because actually there are a wealth of tools, as I said, at your disposal, particularly for these types of conversations.

I'm going to pull gifting into the spotlight here, and I want to put a bit more focus on that, because actually there are policies like gifting policies that can help with reducing the risks that clients and their beneficiaries face when it comes to potential IHT liability. So, let's go into gifting in a little bit more detail. Now, what you'll see on screen is a list of some of the common reliefs and exemptions available. So, we've got your no-rate bands, so about £325,000 currently, your residence no-rate bands, so about £175,000 currently. Of course, for the eagle eyed amongst you might be wondering why I've included residents no-rate bands when I said I'm going to be talking about gifting. I've included it here as part of the wider reliefs and exemptions that are available. But again, remember that it can't be used in respect of gift, and it's there for the benefit of the estate. Unlimited exemption, so all gifts between UK domiciled married couples or registered civil partners are exempt. Gifts to non-UK domiciled spouses or registered civil partners can be exempt, but again, it can depend on circumstances. Gifts that are part of normal expenditure of income. So, I'm going to take a look at that in a bit more detail in a second. So, I'll come back to that one. Annual £3,000 exemption, or gifts up to £3,000 in total per donor each tax year. So, any unused part of that allowance can actually be carried forward for one year, which actually even means, from an opportunity perspective, a married couple could therefore give a total of £12,000 in a year to their children via this exemption if the previous year's allowance hasn't been used. Again, worth noting that you do have to use the current year's allowance first before using the previous year's amount. Small gift exemptions as well. So probably caveat that with within here too.

Gifts of up to £250 per recipients, clients can actually make gifts up to the value of £250 each year to anyone with no limits on the number of £250 gifts that can be given. However, they mustn't have already received gifts from you in the same year. So, if you've already gifted somebody your full £3,000 annual exemption, you can't give them a further £250. You've also got gifts on marriage or civil partnership. So, from this perspective, you can actually give £5,000 for or gifted £5000 from each parent, £2,500 from each grandparent, or £1,000 for anyone else. Gifts to charities are actually a lower rate of IHT, of 36% will apply where 10% or more of a person's net estate is left to charity, as per deaths that occur on or after the 6th of April 2012. Also, outright gifts to individuals in trust. Now this can be exempt if the donor survives seven years from the date of the gift. Those between spouses and civil partners are, of course, automatically exempt. We're going to take a closer look at potentially exempt transfers very shortly. Another exemption worth mentioning, if not mentioned on screen, but actually something just, I think it's worth considering, is family maintenance, so gifts for the upbringing of children and other dependents as well. Really a useful one to consider.
And of course, we also got relief available for the disposable of qualifying businesses and shares of businesses, as well as specific agricultural property too. Now, through all of this, it is really important that we are recording all these gifts so that on the government's website they do have the relevant form, and it's called IHT Form 403, making sure that all registered gifts, or all gifts are registered on that document, is essential. So, if we take a look at that normal expenditure out of income in a bit more detail, I say this is one of the lesser-known ways of reducing the value of one's estate, but it can be one of the most effective, and it's all about gifting money from surplus income. Now this exemption is technically unlimited, but it is often subject to three key tests. So, it has to be from income, not capital. It has to be regular, and it can't reduce the standard of living of the person giving the gift. Now it can be used for paying like school fees, pension contributions, ISA savings for children or grandchildren and then so on, really. Now, within this another way to gift surplus income, bringing it back to protection for a moment, could actually be to set up a whole of life policy as an example, written under trust. Not only in this case, will the benefit on claim be paid out with the estate, but the policy premiums being made from surplus income won't be subject to IHT.
Now, the normal expenditure of income exemption does open up a lot of other opportunities, particularly for those that maybe are still working or who have some excess income that maybe they don't need but want to save for beneficiaries. It can also help clients that are in later life who don't spend all their income that they receive maybe just want to pass on the excess without it being part of the consideration for the seven-year IHT rule. Now, this exemption becomes extremely powerful when the excess income is paid into a trust and that can accumulate over time. It's especially useful if we're saving for minors, for example, if you've got a client that maybe wants to accumulate money for their beneficiaries to use in the future, perhaps to pay for university costs or even a house deposit. Ultimately, through all this again, keep clear records, one of the key top tips. So, it's really important that all clients are documenting all of this and evidence and the intention to make regular payments out of normal expenditure, and any of this is being kept to ultimately be used by any personal representatives who may down the line to claim on this exemption.

Now, I mentioned potentially exempt transfers a moment ago. Now, pets are potentially exempt transfers. These are outright gift to individuals who are not spouses or civil partners, outright gift to individuals and trusts for which you cannot claim an exemption. So, an example could be, say, a one-off gift of £50,000 to your daughter towards buying a home you wouldn't be able to claim the normal expenditure out of income exemption, and it's not a regular gift. Most lifetime gifts excluded, as I said, those between spouses and civil partners and ignoring other reliefs are classed as potentially exempt transfers. Now with a potentially exempt transfer, if the donor survives for seven years having made that gift, it becomes exempt from inheritance tax, as it will be deemed out with the estate. However, if the donor dies within those seven years, the full value of all the gifts can be brought back in and be included within the estate when calculating any IHT liability, and it's obviously going to be applied first against the no-rate band, unless that's covered by different exemptions.

It's worth noting you that taper relief can apply. Now, taper relief can actually apply to the amount of the tax charges we'll look at just now. So, where a potentially exempt transfer itself becomes liable to IHT on death, taper relief could apply if the donor died more than three years after making a gift. Now it is really important to understand that the taper relief applies to the amount of tax payable, not the value of the gift. And on the screen, you can see the rates that relate to the taper relief. Again, remember that gifts are applied first against the no-rate band in chronological order, so if the total pet is below the nil rate band and no IHT is payable, and the taper relief is irrelevant. Now, why am I talking about potentially exempt transfers? Well, it's mainly because it opens up a great opportunity for financial planning with regards to protecting that liability through what's known as a Gift Inter Vivos policy. Now to do this, I'm going to bring another case study into the equation.

So, if we meet Andrea, Andrea's 70-year-old retiree. She wants to help her granddaughter Emily buy her first home. So, she wants to give her a deposit for that home, and she couldn't give it to her £150,000 to do that. Now she's already used up her no rate band of £325,000, let's potentially assuming she's made a gift into trust. So, she's used up her no rate band. So, since she's used to up the full no rate band, that entire £150,000 gift could be subject to inheritance tax if she dies within seven years. Now the potential IHT due on a gift of that potential size we've got on screen on the very right-hand side column. So, if we apply the taper relief, you can see the reduction in IHT due, and by the seventh year, the gift is fully exempt. But what if Andrea died within seven years of making the gift? Remember, it's the recipient of the gift, i.e. Emily, that would be liable for any tax due. So, if Andrea died within three years of making a gift, Emily could potentially owe £60,000 in IHT. Does she have the means to repay that? What's the solution? Well, the most common solution for protecting beneficiaries of these types of gifts from a potential tax liability is to set up a life insurance policy to cover the reducing liability. They're typically known in the industry as Gift Inter Vivos policies. They have these types of policies generally have a seven-year fixed term, and cover reduces in steps to match the reduced liability as the taper relief takes effect. Now, although the cover reduces, premiums will typically stay fixed for the whole seven years. Now, instead of using the Gift Inter Vivos policy, somebody could actually consider building or using a multi cover plan, again, quite common in the industry these days, as a way of replicating a Gift Inter Vivos policies. So, a multi cover plan would be made up of a group of five level term assurance covers. These five covers would run alongside each other with a term of 3, 4, 5, 6, and 7 years respectively. Now the reach cover we would say we should be set at 1/5 of the liability. So, in our example, from before that £150,000 gift from Andrea exceeded a no rate band by £150,000. Therefore 40% live tax liability on £60,000. So, what we would want to do is arrange each of the five covers at £12,000. Now what this will do is it will provide full cover of £60,000, i.e. five policies with a sum of £12,000 from day one and for the first three years, at which point the policy will cease. Thereafter, the total cover provided will decrease by £12,000 each year as the next policy in the multi plan reaches its full term. At the end of year three, you have four covers left giving £48,000 worth of cover. At the end of year four, there are three policies left giving £36,000 worth of cover, and so on. And the reducing cover matches the reducing IHT liability, much in the same way that a Gift Inter Vivos policy does. But there's an added benefit in that using these multi cover versions of these policies is that the premiums that the individual pays will also reduce each year after year three, as each of the individual covers cease. So, this can actually significantly reduce the overall cost. So, what are the benefits of doing this? Well, the benefits from Emily and Andrea's perspective is that, we can see on screen, it means Emily won't face that unexpected tax bill. She's got cover that matches the taper relief hopefully make it more affordable, allows Emily to use the gift without any financial stress of having to repay it back or use some of it to pay any tax, and hopefully it gives Andrea peace of mind. There's a lot of things to consider from our section there. I think the key thing is making sure that we are keeping a robust set of evidence and documentation of that process through the entire step of each step of the way. I'm going to pass back over to you for the last time today take a look at one final question that we've been getting from advisers.

In January's budget update and tax year end planning presentation, we looked at the proposals for pensions and IHT, and they gave a reminder of how IHT applies and the exemptions. And then Gregor has gone into in quite a bit detail today as well. Now we also covered normal expenditure out of income. And subsequently, we've been asked if we could provide an example of how this would work in practice. Now, I know Gregor has gone into this in quite a bit detail. I just want to say about normal expenditure from income. You know, this is one of the more underused exemptions, and it, you know what? It could be quite pertinent when inheritance tax is introduced in 2027 and although Gregor has covered this in quite a bit detail, I just want to cover it from a pensions perspective. How do these contributions work for IHT purposes? And as I said, Gregor has already mentioned these contributions will be exempt or potentially exempt. If there isn't a valid exemption, then they are potentially exempt transfers, and the seven years apply. Now for the individual receiving it as a pension contribution, the amount of the contribution must still satisfy the relevant earnings test, as if the individual was making it themselves. So, if the contributions for, say, a grandchild who is five years old, then the maximum that can be contributed is £2,880, which is then grossed up to £3,600, unless, of course, they've got earnings, for example, there are a child film star or something like that. Now, if the recipient is a higher rate or an additional rate taxpayer, they need to claim the extra tax leave back. Pension itself will be growing within a tax efficient wrapper and will help with the retirement income need. It also has an advantage of the grandparent or the parent knowing that the child or the grandchild can't access that money until they're at least 55 soon to be 57 but they could benefit from tax leave before that point, if they are a higher rate or additional rate taxpayer

So, how can this help with tax planning? To contribute to someone else's pension is a great way to help them and reduce the amount of inheritance tax payable, together with potentially reducing the recipient's income tax. They also benefit from income tax relief. Now, the annual exemption of £3,000 can be used for this, but using the normal expenditure from income expenditure means much higher contributions can be paid. Now let's just have a look at how this works in practice, pulling together several different tax planning angles. So here we have Martin. He's aged 63 years, a widower. He's retired consultant with a final salary pension of £60,000 per annum, but he only needs £35,000. So, he's got significant disposable income and a potential inheritance tax problem. He has a daughter, Maria, who has triplets. They are four years old, and she has a yearly salary of £70,000. This means she's hit by the high-income child benefit tax charge, which effectively cancels out some of the child benefits she receives. Now the child benefit is currently £25.60 a week for the eldest child and £16.95 for each additional child. So, Maria will need to pay a child benefit charge of £1,547 pounds. So, £25.60 for the eldest and £33.90 for the other two, times 52 weeks in a year, equals £3,094 and she has a high-income child benefit tax charge of 50% of that amount. Hence, we got £1,547. Now this means that for the £10,000 Maria earns over £60,000, she actually only sees £4,453 after the income tax of £4,000 comes off, and that £1,547 child benefit tax charge. Now she knows pension contributions would be a good way to escape the trap and reduce her adjusted net income, but she doesn't have any disposable income to do this. Now, if you want a reminder about adjusting the income, again, refer to the January webinar that's on our CPD hub. Now, Martin knows his grandchildren won't have the benefit of a final salary pension, so he decides to save money into a pension on their behalf, the maximum that can be contributed into a pension for someone with no earnings is £2,880 a year. Remember, I said gets crossed up to £3,600 with the tax relief. So, Martin's decided to contribute £2,880 a year into a pension for all of his grandchildren until they reach 18. By contributing the maximum amount into a pension for all of his grandchildren, will reduce the value of Martin's estate whilst building up a pension for his grandchildren. And when his grandchildren reach age 18, Martin tends to help them by saving into LISA to help them buy a property in the future. Now, since the payments are regular, they're from income, won't reduce Martin's standard of living, they can be classed as normal expenditure from income exemption. Now, as Gregor mentioned earlier, you know, as an adviser, you would want to keep evidence of this plan and also any future intentions as well. Now, IHT 403 is really good for monitoring that too. By doing this, there's going to be an inheritance tax saving of £3,456. So, we take three times that £2,880 that equals £8,640 and 40% of that is £3,456 so that's the saving. Now, age 18, the triplets will have £81,560 in each fund. Now that's just calculated using growth rate of 5% excluding any charges, but even though the plan is to stop pension contributions at that point in time, by the time the triplets are 60, there'll be over £630,000 in each fund without them contributing another penny. And by the way, I'm not suggesting they don't make further contributions. It's just the benefit of compounding there.
Just one key point to remember is that a parent must know about a pension set up for a grandchild. That's because the parent should be signing the application form. They're the only person who can make the relief at source declaration, you wouldn't want each set of grandparents setting up £3,600 per year and breaching the law. But what else can Martin do? What about Maria? Well, remember, Maria was left with £4,453 in her bank account for that £10,000 over £60,000. Well, if her dad makes a pension contribution for her of £8,000, that gets crossed up to £10,000, and it reduces her adjusting net income to £60,000, which means that instead of £4,453 in our bank account, then Maria will now have £8,000, plus a pension contribution of £10,000. Now on a family basis, that is 109.3% tax relief. There's a saving of £3,200 inheritance tax, £4,000 income tax for Maria, and also that £1,547 child benefit tax. So, our key takeaways from this section are, keep an eye out for that IHT consultation coming out in the summer, and think about gifting during lifetime if any of your clients are keen for their beneficiaries to reduce or avoid inheritance tax.

Now, as always, we like to make sure that we can provide you with those valuable CPD credits. As Gregor said at the start, and for that, we have to have not just learning objectives, but learning outcomes as well. I do hope that you enjoyed this session, on behalf of Gregor and I, thank you very much for listening to us, and we look forward to you joining us in future webinars as well. Thank you.