A closer look at relevant life plans – what they are and when you could recommend them

Ian Smart – Product Architect

Relevant life plans (RLP) are a relatively new product that can give those clients who are business owners a tax efficient way to protect their employees.

They can also be an easy way to help introduce the concept of business protection to your clients. As one of the two people who helped introduce RLP to the market I thought I’d take a closer look at this type of cover.

What are relevant life plans?

A relevant life plan is a death-in-service plan set up and paid for by an employer. These plans are covered by the same legislation that deals with group schemes. But unlike most schemes provided by large employers, they don’t fall under pension legislation because they’re ‘non-registered’.

Some companies are big enough to run either a registered group scheme or an excepted group life scheme to pay for life cover for their employees. These are tax-efficient because the payments they make aren’t treated as a P11D benefit, and they qualify for corporation tax relief. What’s more, the benefits are payable tax-free to the dependants.

But directors of smaller companies were missing out because it hadn’t been possible to have a one-member scheme, and group risk providers don’t usually cater for fewer than five members. So these directors were paying for personal plans from their income after tax, or from the company account. If they paid from the company account, the payments were treated as income and taxed accordingly.

How did relevant life plans evolve?

Relevant life plans first became available after the pensions legislation changes that were implemented in 2006, known then as ‘A-day’. Originally relevant life plans were only offered as an add-on to a group scheme to allow additional cover to be provided to individual members of the scheme.  They were used as a way to increase the amount of cover for certain individuals free of the restrictions on calculating benefits under a registered group life scheme.  They were also used as a way of limiting a high earner’s risk of suffering a lifetime allowance charge on their pension fund. But they were still only available to those businesses big enough to offer a group death-in-service arrangement.

But Royal London under its former brand Bright Grey recognised there was a gap in the market for smaller businesses who weren’t able to access group schemes and in late 2009 took the opportunity to be the first provider to offer a relevant life plan on a standalone basis with no group arrangement needed. Whilst some advisers and customers were understandably initially sceptical given the fairly generous tax treatment relevant life plans benefit from, once the legislation was explained to them and they could see this wasn’t a loophole that was being exploited, the number of businesses taking out relevant life plans grew quite quickly.  This naturally attracted attention from our competitors and the demand for relevant life plans really started to grow once other providers started to recognise the benefit of relevant life plans to small businesses and they too offered their own versions of these plans.

Who are relevant life plans intended for?

Relevant life plans are ideal for:

• People with high earnings and big pension funds who don’t want their death-in-service benefits to form part of their lifetime allowance.
• Small businesses that don’t have enough eligible employees for a group life scheme.
• People who are currently in a group death-in-service scheme that doesn’t allow voluntary increases, or has restrictive definitions of remuneration.
• People in a group death-in-service scheme who don’t want their cover linked to salary at death but need a fixed sum.

But what’s also important for you as an adviser is that relevant life plans are an ideal way to introduce the need for protection to any of your clients who are running their own company.  This doesn’t only include providing a tax efficient way to protect their own family or that of an employee, but also includes any need they may have for key person, loan or shareholder protection.  Relevant life plans are therefore a great door opener for other protection opportunities and with the increasing number of small businesses being set up the opportunity is increasing every year.

We have lots more information about why you should choose Royal London for relevant life plans, including our new sales aid that looks specifically at the benefits of our RLP, on our website.