The reason that qualifying policies, especially MIPs, have been targeted is because they gained popularity as an alternative to pension savings. This was after the annual pension allowance was reduced from £255,000 to £50,000 in April 2011 with HMRC stating that it could not afford to give tax away to people using qualifying policies which currently have no limit for tax relief.
Under the current proposals there would be:
• An annual limit of £3,600 in premiums paid into new qualifying policies from 6 April 2013
• Transitional rules for policies commencing between 21 March 2012 and 5 April 2013
Alternatively, it is possible to use offshore regular premium policies which are not qualifying policies and are not caught by this change.
They are designed for medium to long-term savings and usually have a minimum investment of around £500pm or £6,000pa. Investors can make use of the cumulative 5% tax-deferred withdrawals and, on encashment, any chargeable gain will be taxed at the policyholder’s marginal rate which, if they have just retired, may be a lower rate than now.
It is not just alternative pension savings that they can be used for. They are also suitable for:
• anyone who is a UK resident employee and spends time abroad for work;
• parents looking for help with nursery or school fees;
• students requiring help with university fees;
• anyone looking to leave the UK when they retire but looking to fund now;
• high earners who get paid in an irregular fashion or;
• anyone who earns a very high regular salary;
• holding in a trust.
One advantage with a regular premium policy is that if it is to be used for inheritance tax planning and there is surplus income it may be possible to claim the ‘normal expenditure out of income’ exemption meaning that all the premiums would be exempt immediately and there would be no seven-year clock ticking.
A further advantage of using a regular premium policy is getting the benefit of pound cost averaging. The last few years have shown how volatile markets can be and although there have been periods of impressive rises there have also been periods of significant falls. By making regular investments it can be possible to make a gain during a particularly volatile time in the market.
Cathy Russell, Tax and Estate Planning Consultant at Canada Life
