The Chancellor’s Autumn Statement – the Sexy bits

OK so there wasn’t anything that really made the eyes roll this time around, but there were some pleasant confirmations and a relaxation on ISA inheritance: (see also separate blog “The Chancellor’s Autumn Statement – the Taxy bits” for the more routine stuff)…

smug pension kid

Daddy has a really nice pension!

Flexible Pensions and Death Benefits confirmed.

These changes will  have an increasing influence on the direction of estate planning, as their repercussions become more widely accepted.

On death before age 75, any death benefit will be paid tax free provided it is within the Lifetime Allowance (LTA). Thus there is no longer a distinction between “crystallised” and uncrystallised” pots for pre-75 death benefits.

On death at 75 and later, the remaining fund forms death benefits which are taxable on the recipient at his / her income tax rate, when they draw the funds.

Any individual beneficiary of a flexible pension can choose to keep their inherited pension pot in the drawdown wrapper and decide when (or if) they draw down on it. Inheritable Pensions! This IMHO puts pensions at the forefront of inheritance planning going forward.

Inheritability of ISAs

Previously, upon death of a married account holder, their  ISA money would no longer carry ISA status in the hands of the inheriting spouse / civil partner. It now does, so the surviving spouse has the benefit of continuance of that tax-free savings wrapper . This only applies to spouses (spice?) or civil partners however, other beneficiaries will receive the money without ISA status.

Whilst inheriting ISA funds from your spouse is free of inheritance tax (because of the spouse exemption) it is still going to be taxable as part of the estate on second death. So there can be instances where individuals (who are near to or already over age 55) can find it to their advantage to use a personal pension contract to receive their ISA funds:

  • You need earnings to qualify for tax relief on the contributions (although you can contribute a small sum without earnings – £2,880 p.a. net).
  • you can still withdraw the funds from the pension (if 55 or above)
  • you (usually) end up with more cash net of tax
  • the death benefits are the whole fund is payable tax free on death pre-75
  • the death benefits can be directed into a discretionary trust if you prefer (spouse bypass trust)

Single Lifetime IHT Settlement nil rate band

This idea has been dropped (sigh of relief there). The idea of just a single IHT nil rate band for lifetime settlements, i.e. allowing only £325,000 to be gifted in one’s lifetime and allocated across all relevant property trusts they created, has been axed. For the time being at least, the £325k rate will re-set every seven years as before. However there is still likely to be a simplification of periodic and exit IHT tax charges on trusts, to stop people taking advantage of the rule in “Rysaffe” where multiple trusts reduce the overall tax bill.

Business Protection Solutions

Many people think that the term “business protection” is just one generic type of cover that can be shoehorned into just about any business arrangement. This is quite wrong.

All businesses are different, and should have a business protection solution that fits their needs. This paragraphs below set out basic information on the four key types of cover a business should consider:  Key Person Cover, Share Protection Cover, Relevant Life Plan and Business Loan Protection. They can be set up separately or combined; usually a small discount can be achieved if more than one type of cover is taken out at the same time.

The manner in which the four types of cover should be applied to different types of business, i.e. limited company/Limited partnership, standard partnership and sole trader, will vary somewhat , as will the proper use of trusts and any side agreements where appropriate. This is a skilled area where an experienced insurance intermediary earns his keep.

Businesses should not go it alone in setting up their cover, and whilst it is common for banks to provide cover to businesses particularly where business loans are concerned, bear in mind that the terms obtained from your bankers are rarely as competitive as can be found through an independent intermediary, so if you feel you have a choice, (i.e. your friendly bank hasn’t got a gun to your head!) get a second quote by calling us on 0845 013 6525 (might as well get a sales pitch in!).

The general rule regarding tax relief on premiums, or potential taxation of benefits, is if tax relief is obtained on premiums the benefits are liable to be taxable, and if no tax relief is obtained on premiums then benefits are likely to be tax-free. The exception to this principle would be the Relevant Life plan where premiums may be treated as a business expense for tax purposes in the majority of cases (so long as the “wholly and exclusively” rule is considered to be met) and any policy proceeds should be free of tax in the hands of the beneficiaries.

We recommend that the business checks their tax position on their proposed business protection (usually through its accountant) with the local Inspector of taxes, to gain comfort and confirmation.

Key Person Protection

This is designed to pay the policy proceeds directly to the business on the death or critical illness of the key person, which can be used to help replace that key person, cover the loss of profits that may occur or repay a loan. The policy proceeds would help a business to continue trading through a difficult time.

Share Ownership Protection

Designed to provide the surviving shareholders / partners with the funds to purchase the deceased’s or critically ill partner’s/director’s/member’s share of the business. The policy would be under trust and would also require a cross option agreement to be put in place, which gives the survivors the right to purchase (and can also give the deceased’s representatives the right to force the sale). The cross option agreement therefore necessarily requires an agreed method of valuation of the business to be appended. The business can select a simple calculation (e.g. a multiple of average profits over the past n years), design it from scratch or otherwise take advice from their IFAs or accountants.

This type of cover is relevant to practically all business organisations. Whilst the paperwork and business valuation side of things may seem a little daunting, a good intermediary will help you by careful fact-finding and design of the right plan structure for your business, and implement it along with completion of all of the relevant trust forms. Your accountant should also probably be involved if only to confirm understandings as to likely future tax treatment under certain scenarios.

Relevant Life Plan

This is a tax efficient single life Death in Service benefit for employees or directors of a business. The policy proceeds are paid to the Trustees (employer) and the benefit is written under Trust for the life assureds beneficiaries. Typically there is tax relief on premiums and no tax on proceeds making this a very popular type of plan amongst small businesses which do not have group life policies, or as additional cover for directors and senior management for firms which do. Critical illness cover is not available under this type of plan.

Business Loan Protection

This is designed to pay off any outstanding loans the business may have should a main shareholder, director, partner or other key individual suffer a critical illness (if selected) or die. It shares many things in common with the more general Key Man protection, but is likely to be of a fixed term in line with the loan. If you think your business is going to regularly roll over its finance then it might be prudent to take out cover over the longer term, rather than take out a new policy every few years, which would be cheaper in the long term and avoid the risk of high future premium costs if the insured’s health should decline in future.

Business Protection is relevant to just about every form of business organisation, from the sole trader to a FTSE 100 plc.

The New Gender Directive on Annuities and Insurance Contracts

European Bureaucrats keep coming up with daft ideas which somehow, after years of solemn deliberation and noses (and front trotters) in troughs, get passed into laws and imposed on us sensible Brits. The reasoning within the Gender Directive is that it is somehow inappropriate to treat men differently to women and vice versa.  So even though we typically live for differing terms, are exposed to differing risks in our daily lives and suffer differing illnesses along the way, we can no longer be treated differently in insurance related contracts becuase of “gender equality”. It’s a bit like a Frenchman saying there is “now no difference between men and women”  – Yeah right! (unless he’s referring to Eastern bloc Olympic athletes from the 70’s perhaps) “Vive le Difference” I say, but nevertheless we’re stuck with this latest bit of Euromerde.

What you need to know:

From 21 December 2012, it will not normally be lawful to offer customers different insurance rates for males and females. This means that annuities and life and health insurance will generally need to be written on unisex terms.

This means that we expect annuity rates for men to worsen somewhat as they move closer to the existing level for women (women typically live longer than men so men’s annuity rates have traditionally been better). This will apply to open market options on personal pensions and occupational defined benefit, but not to Scheme Pensions (annuities obtained on the member’s behalf through occupational schemes).

For life insurance, expect to see womens premium rates worsen, with maybe some initial improvement in mens rates (women, living longer, have traditionally received better rates).

Finally, for health insurance like income protection, where claims may be made long-term where the insured cannot work due to accident, injury or illness, men’s rates will worsen somewhat as they approach womens rates (we men are healthier, but die younger).

The reason for the current differentials in rates is simply because of the differences in lifespans and claims experience, all duly noted by actuaries with decades of data and experience. It is entirely fair to charge more to insure a male white-collar worker’s life than the equivalent woman, because he represents a higher risk to the insurer simply because he is a man. Now we have legislation which seeks to put an end to this “injustice”.

This only affects contracts written from December 21, 2012, so if you wish to effect a contract such as some life cover or an annuity or income protection, and will benefit from the old-style pricing, there is a window of opportunity for the next few months. 

Perhaps Brussels, having concluded their work on legislating against human biology, should now legislate the weather. How about all European states enjoying more sunshine days in the year must into a common fund to pay for the holidays of inhabitants of the cooler, wetter countries. What do you mean, they want to tax our fresh drinking water? Windermere will do nicely will it ?  OK sorry I mentioned it.     

Euro Piggies

Europhobic gag

Whole of Life insurance zz.zzz.zzz

OK some topics aren’t exactly exciting but this is supposed to be a financial blog after all.

Carrying on with the direct offer by post theme, Legal and General recently sent me an offer for whole of life insurance. The deal is that I am guaranteed to be accepted, but if I die from natural causes in the first two years it doesn’t pay. Also, if I lived to the age of 90, I don’t have to pay premiums thereafter but the cover remains in place.

Looking at the rates on offer, compared to standard rates I can obtain in the market, I see that as a healthy non-smoker, I can obtain more than double the cover with Legal and General themselves on the same type of plan for the same price. However, that route involves underwriting and a lengthy application form.

So whilst a plan like this is poor value for a healthy person, I guess it could well be attractive to somebody in less than good health, so long as they are not at death’s door.

And if you sign up you get £50 worth of M&S vouchers as a “birthday gift”. Yippee. Only it will take at least three months to arrive. 

So to re-cap, if you’re not in good health, want to insure your life, and fancy a socks and underwear shopping spree, you might want to sign up. But I recommend that you speak to an IFA first, as the simple route isn’t always the most economic.