Pension Policy and Life Insurance

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At last, a real life insurance bargain - but as always there are

strings

attached!

If you take out a new pension policy after 6 th April 2006 and within

the same premium pay for life insurance cover, then you can use your

pension contribution tax allowance to reduce the cost of your life

insurance. This means if you're a standard rate taxpayer, you'll

receive

22% tax relief on your life insurance premiums and relief at 40% if

you're a higher rate taxpayer.

Combined pension policy and life insurance

The combined premium you pay for your pension and life insurance will

automatically be reduced by 22% by the pension provider. But if you're

a

higher rate taxpayer, you'll need to claim the balance to bring your

relief up to 40%, on your year-end self-assessment tax return.

But there are three strings attached:

The pension company must also provide your life insurance and be paid

as one combined premium.

The current value of your pension fund plus the sum insured by your

life insurance policy must not exceed £1.5 million.

Your combined annual premium for your pension and life insurance must

not exceed £215,000.

In practice the savings on your life insurance will not be quite as big

as you might otherwise expect. Its because the underlying premium for

the life insurance cover will be a bit more expensive than a

stand-a-lone policy with the same company and, in all probability, the

insurance company providing your pension policy won't be the cheapest

on

the life insurance market. Furthermore, you can't buy a combined

pension

and life insurance policy online - so you'll miss out on the Internet's

discounted life insurance prices.

Nevertheless, if you're a higher rate taxpayer, your tax savings are

bound to guarantee that your life cover is a real bargain! If you're a

standard rate taxpayer you'd be wise to do a little homework. Before

you

buy, you should get an online quote for life insurance to compare

against the price you'd pay if you bought it alongside your new

pension.

Other things to know about combined pension policy and life insurance

There are some other points you also need to know. Firstly we know

you'll ask whether you can convert your existing life insurance policy

into a combined pension purchase. The answer is no! The tax relief is

only available if from the outset, you take a pension and life

insurance

policy as one combined purchase.

Secondly, the life insurance cover can only apply to the owner of the

pension policy - you can't add in anyone else on the life insurance

policy. Joint policies aren't available as a pension/life insurance

package.

And whilst many people also add critical illness cover to their life

insurance, this is not possible when you have a pension/life insurance

package. Critical illness cover pays out a tax-free lump sum if you are

diagnosed with a specified serious illness which is listed on your

policy. If you want critical illness cover, you'll have to buy a normal

stand-a-lone policy.

Finally, if you're going to buy a pension life insurance package and

replace your existing life cover, a few words of warning. You'll

obviously be older now than when you first took out your existing life

insurance policy. This means that the premium rate on your new cover

will be higher. Furthermore, the premium for your new policy could be

loaded if you've developed any medical conditions since taking out your

original life insurance. Remember, even if you've simply put on weight,

your premium could be loaded. In extreme medical cases, the proposed

insurer might even totally refuse to provide life cover. To avoid the

possibility of being caught without life insurance cover or being

forced

to accept a more expensive premium, you should obtain written

confirmation from your pension company that they will insure you. You

then need to compare their proposed cost, net of tax, with your

existing

premium.

Resource Box

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