In the last Budget, Gordon Brown put back the clock some twenty plus years by announcing that life insurance can attract tax relief. However, tax relief only applies to a particular new sort of life policy.

The initial response from life insurance professionals was subdued. That was until the full extent of the savings became appreciated. Standard taxpayers can save around 15% and higher rate taxpayers can save a hefty 30% off the cost of their life insurance premiums. And it now looks as if up to 50% of all new policyholders can make these savings!

These new policies are marketed under a number of names ranging from Level Term Pensions Life Insurance to just plain Pensions Life Insurance. But don’t be put off by the word “pensions” – you don’t have to buy a pension and neither do you have to have a pension already! The word “pensions” is there because the legislation which introduced the tax loophole for these policies is part of a wider change in tax legislation which relates to primarily to pensions and Inheritance tax.

You should be aware that not everyone will qualify for these tax savings and a Pensions Life Insurance policy will not suit everybody. That’s why these policies must be bought from a broker who will advise you. And because of the nature of these special policies, at the moment you can’t get a live quote on your computer screen – the broker will have to get competitive quotes and phone you back.

So what does Pensions Life Insurance do? It pays out a lump sum if the policyholder dies or is diagnosed with a terminal illness which will result in death within twelve months.

But there’s only one type of policy available: there can only be one policyholder (joint policies are not available but you could take out a policy for yourself and a separate policy for your partner), and the cover remains constant for the duration of the policy. Neither can you add critical illness cover into the policy.

That means that a Pensions Life Insurance policy will not be the cheapest way to protect a repayment mortgage unless you’re happy to buy more cover than you actually need to repay the mortgage. If sadly, there is a payout, then with a Pensions Life Insurance policy, your mortgage would be repaid and any the surplus could go to your family. However, if you want the cheapest way to protect a repayment mortgage, then a low cost Mortgage Life Insurance policy with decreasing cover will almost certainly be the best solution – but you won’t get tax relief on your premiums!

Now you may be wondering why the savings you’ll make are less than the value of your tax relief. It’s because on average, Pensions Life policies are some 15% more expensive than a like for like conventional life policy. The insurance companies are charging more for them because they have more work to do to reclaim the standard rate tax relief.

If you’re a higher rate taxpayer, you’ll get the standard rate of tax deducted from your premium by the insurance company but you’ll have to reclaim the difference between standard and higher rate tax via your Annual Tax Return. Once you’ve entered this on your Return, H M Inland Revenue will continue automatically to award the relief for the policy’s duration.

By now you will have begun to appreciate why we believe that you must get advice before you buy one of these tax relief policies. If you aren’t already convinced, consider the some more elements which the Chancellor of the Exchequer threw in!

You cannot have a Pensions Life Policy if your pensions contributions plus your life insurance premiums are greater than £215,000 per year. That shouldn’t worry too many people!

Then you have to factor in that if the value of your pension fund plus the payout from the policy exceeds £1,500,000, then you will be taxed at 55% on the excess! (Conventional life insurance policies are excluded from this calculation.) Again this restriction shouldn’t concern too many people - but you have to be aware of it.

So in summary, the information we are receiving indicates that around 50% of people will find that Pensions Life Insurance is the cheapest solution for their life insurance needs.

But, we repeat, do not buy it without expert advice.

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