Providing a financial safety net for your loved ones

Whether you’re looking to provide a financial safety net for your loved ones, moving house or a first time buyer looking to arrange your mortgage life insurance – or simply wanting to add some cover to what you’ve already got – you’ll want to make sure you choose the right type of cover. That’s why obtaining the right advice and knowing which products to choose – including the most suitable sum assured, premium, terms and payment provisions – is essential.

Life assurance helps your dependants to cope financially in the event of your premature death. When you take out life assurance, you set the amount you want the policy to pay out should you die – this is called the ‘sum assured’. Even if you consider that currently you have sufficient life assurance, you’ll probably need more later on if your circumstances change. If you don’t update your policy as key events happen throughout your life, you may risk being seriously under-insured.

As you reach different stages in your life, the need for protection will inevitably change. These are typical events when you should review your life assurance requirements:

• Buying your first home with a partner
• Having other debts and dependants
• Getting married or entering into a civil partnership
• Starting a family
• Becoming a stay-at-home parent
• Having more children
• Moving to a bigger property
• Salary increases
• Changing your job
• Reaching retirement
• Relying on someone else to support you
• Personal guarantee for business loans

Your life assurance premiums will vary according to a number of different factors, including the sum assured and the length of your policy (its ‘term’), plus individual lifestyle factors such as your age, occupation, gender, state of health and whether or not you smoke.

If you have a spouse, partner or children, you should have sufficient protection to pay off your mortgage and any other liabilities. After that, you may need life assurance to replace at least some of your income. How much money a family needs will vary from household to household so, ultimately, it’s up to you to decide how much money you would like to leave your family that would enable them to maintain their current standard of living.

There are two basic types of life assurance, ‘term’ and ‘whole-of-life’, but within those categories there are different variations.

The cheapest, simplest form of life assurance is term assurance. It is straightforward protection, there is no investment element and it pays out a lump sum if you die within a specified period. There are several types of term assurance.

The other type of protection available is a whole-of-life assurance policy designed to provide you with cover throughout your entire lifetime. The policy only pays out once the policyholder dies, providing the policyholder’s dependants with a lump sum, usually tax-free.

Depending on the individual policy, policyholders may have to continue contributing right up until they die, or they may be able to stop paying in once they reach a stated age, even though the cover continues until they die.

Tax matters
Although the proceeds from a life assurance policy are tax-free, they could form part of your estate and become liable to inheritance tax. The simple way to avoid inheritance tax on the proceeds is to place your policy into an appropriate trust, which enables any payout to be made directly to your dependants. Certain kinds of trust allow you to control what happens to your payout after death and this could speed up a payment. However, they cannot be used for life assurance policies that are assigned to (earmarked for) your mortgage lender.

Generally speaking, the amount of life assurance you may need should provide a lump sum that is sufficient to remove the burden of any debts and, ideally, leave enough over to invest in order to provide an income to support your dependants for the required period of time.

The first consideration is to clarify what you want the life assurance to protect. If you simply want to cover your mortgage, then an amount equal to the outstanding mortgage debt can achieve that.

However, if you want to prevent your family from being financially disadvantaged by your premature death and provide enough financial support to maintain their current lifestyle, there are a few more variables you should consider.

• What are your family expenses and how would they change if you died?
• How much would the family expenditure increase on requirements such as childcare if you were to die?
• How much would your family income drop if you were to die?
• How much cover do you receive from your employer or company pension scheme and for how long?
• What existing policies do you have already and how far do they go to meeting your needs?
• How long would your existing savings last?
• What state benefits are there that could provide extra support to meet your family’s needs?
• How would the return of inflation to the economy affect the amount of your cover over time?

Frequently asked questions

UK employers now have a legal duty to enrol most employees into a qualifying workplace pension scheme and contribute towards their retirement following changes in the Pensions Act. Read more…

“So what do I do with my money?”

There are two main types of occupational workplace pension schemes: Read more…

Immediate access to your pension funds, allowing you to take out what you want, when you want it

As your wealth grows, it is inevitable that your estate becomes more complex. With over 400,000 people now expected to reach age 75 each year [1], more and more people could be faced with a 55 per cent tax charge on any money left in their pension fund when they die. Read more…

When you’re not ready to convert your pension fund into retirement income

If you decide that you’re not ready to convert your pension fund into retirement income by buying a lifetime annuity, but you do need funds, you have a few options. These are often known as income drawdown options. Read more…

Women could increase their pension income
by over 20 per cent

The new 20 per cent uplift in capped income withdrawals, applicable from the 26 March this year, means that people could start to see the benefit of this uplift from the start of their new income year following this date. Read more…

Additional income protection

If you have a partner or other dependants, such as children, you might want to think about additional retirement income protection. With income protection, your named dependants could get some or all of your retirement income if you die, either as regular payments over a period of time, or as a one-off lump sum. Read more…

Valuable options that allow you to tailor the income you need

In the UK, there are basically two types of annuity:
• pension annuities (compulsory purchase)
• purchased life annuities (voluntary purchase) Read more…

An important one-off decision that has long-term consequences if you get it wrong

If you save through a private personal pension, when you approach retirement age you’ll have to decide what to do with the pension fund you have built up. If applicable to you, one option is to buy an annuity. It’s important to find an annuity that suits you and provides the best deal because, after your property, an annuity is probably the biggest purchase you will ever make. Read more…

To afford the lifestyle you want when you retire, you need to do something about it today

It may be tempting to say, “But retirement is a long way off”, yet it’s never too early to start investing in order to protect your future. To afford the lifestyle you want when you retire, you need to do something about it today. You now have a much greater choice when it comes to how and when to take retirement benefits from pensions since the pension simplification rules were introduced.

UK’s pension tax regime radical overhaul
On April 6, 2006 major changes were introduced to the structure of UK Pension schemes. These changes heralded probably the most radical overhaul of the UK’s Pension tax regime. The new simplified regime was largely a replacement of the past pension framework as opposed to the addition of another layer of legislation.

The most important thing is to plan your retirement funding strategy in advance. Anyone investing in a pension should remember that whilst pensions are extremely tax-efficient, it’s important to regularly review where your money is invested. This becomes more important as you begin to approach retirement when your investment aims may gradually change from growing the value of your pension fund to protecting it.

A private personal or stakeholder pension scheme could be right for you if:
• you want to save money for retirement in addition to your occupational workplace pension
• you’re self-employed, so don’t have access to an occupational workplace pension scheme
• you aren’t working but can afford to pay into a pension
• your employer offers it as an occupational
workplace pension

Personal and stakeholder pensions are ‘defined contribution’ private pensions that you arrange yourself. You contribute money into a pension fund which you use to buy a regular income when you retire. Sometimes employers set up group personal or stakeholder pensions for their employees.

Tax-efficient environment
Personal private pensions grow in a tax-efficient environment. You pay no capital gains tax on any growth and no further UK tax on any income the investments produce, and income from fixed-interest investments and deposits are received gross.

UK investors under age 75 can benefit from up to 50 per cent pension tax relief (2012/13 tax year) and 45 per cent (2013/14 tax year).

The higher your rate of tax, the more tax relief you could receive. Even non earners, including children, and those with an income under £3,600 can benefit, but can only contribute up to £3,600 this tax year.

Basic-rate tax relief of 20 per cent is added automatically. For instance, you contribute £8,000 to your pension and the government adds £2,000, to make a total investment of £10,000.

Higher-rate taxpayers can claim back up to a further 20 per cent through their tax return – another £2,000 in this example. So the cost of a £10,000 contribution is as little as £6,000.

Top-rate taxpayers can claim back up to a further 30 per cent (2012/13 tax year) through their tax return – another £3,000 in this example – so the cost of a £10,000 contribution is as little as £5,000, and 25 per cent (2013/14 tax year).

Annual allowance
The annual allowance (£50,000 in the 2012/13 to 2013/14 tax years) caps the maximum contributions that can be made by anyone (yourself or your employer, for instance) into all your pensions in a tax year. This limit does not apply to consolidating pensions, but includes the value of benefits built up in final salary schemes.
The table shows you the annual allowance for the tax years 2012/13 to 2013/14. Lifetime allowance
The lifetime allowance is the maximum amount of pension benefit you can build up over your life that is available for tax relief. If, when you take your pension benefits, these are worth more than the lifetime allowance there is a tax charge (the lifetime allowance charge) on the excess.

The lifetime allowance charge is a tax charge paid on any excess in the value of your pension benefits over the lifetime allowance limit. The rate depends on how this excess is paid to you. If the amount over the lifetime allowance is paid as:

• lump sum – the rate is 55 per cent
• taxable pension – the rate is 25 per cent

The table shows you the lifetime allowance for the tax years 2012/13 to 2013/14.

Input periods
When you contribute to a private personal pension, your contributions count towards the annual allowance of the tax year in which they are made. For instance, a contribution you make in March 2013 counts towards the 2012/13 tax year. This is not necessarily the case for other pensions. If you have contributed more than £50,000 across the last two tax years, a contribution you make could unknowingly take you over
the annual allowance.

Carry forward
If your total pension contributions for the tax year are more than the annual allowance you may still be able to claim tax relief as you can carry forward any unused allowance from the previous three years to the current tax year. You will only have to pay tax on any amount of pension contributions in excess of the total of the annual allowance for the tax year plus any unused annual allowance you carry forward. These carry forward rules are not being changed. The effect of this is
that for 2014/15 you will be able to carry forward up to
£50,000 unused allowances from each of the tax years
2011/12 through to 2013/14.

When you can receive your pension
The earliest age you can receive a private personal or stakeholder pension is usually 55, depending on your arrangements with the pension provider or pension trust. You don’t have to be retired from work.

The 3 basic steps when arranging your retirement income are:
• decide when you want to retire
• decide how you want to be paid
• shop around for the best deal on a regular payment (buying an ‘annuity’)

Deciding when to retire
Generally, the older you are when you take your pension the higher the payments because your life expectancy is shorter.

Deciding how you want to be paid
When you’re close to retirement you have to decide how you want your pension to be paid. This will depend on the arrangements you have with your pension provider but usually you’ll have the option to take up to 25 per cent of your pension fund money as a tax-free lump sum and the rest as regular payments. These could be monthly, quarterly, half-yearly or annually.

If all your pension funds total £18,000 or less, you can usually take the whole amount as a lump sum. You have to be at least 60 to do this. If your private personal pension or stakeholder pension is less than £2,000 you can usually take it as a cash payment, no matter how much you get from other pensions.

In some cases, when you’re under 75 and are expected to live less than a year, you can take your whole fund as a lump sum. You won’t have to pay tax on it unless your pension funds are worth more than the lifetime allowance.