What is Pension Term Assurance? This article is written by Ian Feighery QFA, RPA, FLIA - founding Director of Summit Financial Planning.
What is Pension Term Assurance?
Pension Term Assurance, or Pension Life Insurance, is a type of life cover plan that you can take out before you retire. It pays a lump sum to your estate if you die during the term of the plan. They can use this however they want; to pay bills, loans – whatever matters most.
One of the biggest advantages that Pension Term Assurance holds over other life cover plans is that it generally should cost you less. This is because, if you are eligible, you can claim income tax relief on your premiums or your employer can put this type of cover in place for employees.
Different Types of Pension Term Assurance Plans
Personal Pension Term Assurance:
This is a Pension Life Insurance Plan that can be taken out by a self-employed individual or an employee who is in non-pensionable employment (person not a member of a company pension scheme).
Basically, it is a life cover plan but with the attractive advantage that the premiums can qualify for income tax relief at either 20% or 40% depending on the individual’s tax rate. As it is a personal policy, the full benefit amount will be paid out as a lump sum to the estate of the deceased. If the death benefit is paid to a spouse or civil partner then no tax liability will be due.
Some possible disadvantages of this type of plan are:
It is not possible to assign the plan to a loan or mortgage. Institutions are unable to take assignment of this type of plan and a standard life cover or mortgage protection plan would be required
The tax relief will be withdrawn if the individual stops working or becomes a member of a company pension scheme
The maximum contribution percentage you can claim income tax relief on depends on your age (15%, 20%, 25%, 30%, 35% & 40% of your net relevant earnings) and is capped at an earnings limit of €115,000. The above percentages are inclusive of any personal pension or PRSA pension contributions
Executive (Company) Pension Term Assurance & Death-In-Service Schemes:
This is a Pension Life Insurance Plan that an employer can put in place on behalf of the employee. The premium is fully paid by the employer and the employer will receive corporation tax relief on the premiums they pay on the employee’s behalf. Employer payments are not considered a benefit in kind (BIK), so the employee does not have to pay income tax on these payments.
Unlike personal pension life insurance, there are rules in relation to what level of benefit can be paid out. Generally, employers put in place a benefit amount which is a multiple of an employees’ final salary, e.g 2 times final salary, 4 times final salary etc. The reason for this is due to fact that this type of plan has rules around how much can be paid out to the deceased’s estate in the event of death.
The rules are as follows:
The maximum lump sum which can be paid out is 4 times final salary at the date of death, plus any employee and additional voluntary contributions (AVCs) made to the company pension. Please note an example of this where an employee has a company pension life insurance plan with a 4 times final salary benefit:
€50,000 final annual salary of employee
€100,000 company pension value which employee and employer contributed 50/50
€200,000 maximum lump sum (4 x €50,000)
In this example, a total €250,000 lump sum is paid to the estate of the deceased (€200,000 max lump sum + €50,000 employee pension contribution)
The remaining €50,000 employer pension contribution must either be used to purchase an annuity for the dependants of the deceased or be invested in a post-retirement bond called an Approved Retirement Fund (ARF). This option to invest in an ARF was approved in the Finance Bill 2021. The ARF offers more flexibility and options than the annuity but we are not going to delve into this in this article
For the above example, it is assumed that the individual has no other pension benefits
Similar to the personal pension life insurance plan, it is not possible to assign this policy for a loan or mortgage
Both of these types of cover are an excellent way of providing life cover to help protect your family in the unfortunate event of an untimely death. Life cover is one of the most important benefits available which will help in part or full to provide financial security to a family, especially if that person is the main earner of the family.
The recent changes in the Finance Bill 2021 that have now come into effect where the beneficiary of a company pension life insurance claim can choose to purchase either an annuity or an ARF make this cover even more attractive. Also, the fact that the employer pays for the plan and there is no BIK liability to the employee is a real bonus.
Finally, the tax relief available on personal pension life insurance is very generous especially for higher rate tax payers. They can reduce the cost of their life cover premiums by 40%!! For family protection cover there is no better value product available on the market and a review of your existing life cover policies is always worthwhile.
Need more information?
Summit Financial Planning is a full financial planning firm that operates out of Dublin 2. They can be contacted by email at firstname.lastname@example.org or by phone on 01-4445282.
Summit Life & Pensions Ltd T/A Summit Financial Planning is regulated by the Central Bank of Ireland.