Could This Save You Some Cash?

If you're forking out for a life assurance policy each month, this scheme could save you a fortune.

Regular readers of the Fool will know how we like to help you save a few (hundred) quid here and there. Switching to cheaper gas and electricity suppliers, moving your cash to a best buy savings account and shifting any expensive debt to a 0% credit card are just a few of the methods we favour. However, there are some less obvious ways we can save money.

Pensions

Most of us know that there was a major shake up of pensions in April this year, known as "A" Day. Essentially, the rules changed, meaning that we can now stash our whole, gross salary (up to £215,000) into our pensions, if we wanted to. And whilst this may sound a bit nutty, when you take into account the tax efficiency of pensions (a higher rate taxpayer can hang onto 40 pence from every pound that would normally go to Gordon Brown) you can see that there are worse places to squirrel any extra cash!

But that wasn't the only shake-up to occur on A Day - changes were made to a lesser known scheme called Pension Term Assurance (PTA) too.

Pension Term Assurance

Pension Term Assurance is essentially life assurance that you can buy within your pension's wrapper, so the premiums are paid free of basic rate tax (higher rate taxpayers can pay for their premiums out of their gross salary by including this in their tax return). Sounds great, doesn't it? So why haven't you heard of it before? Well, previous pension rules meant that we could only contribute up to 10% of our total annual pension contributions to PTA each year. Few insurers offered it and with little competition premiums were expensive, thus the savings made compared to traditional life assurance policies were nominal.

However, A Day rulings mean that we can now contribute our whole salary (or up to £215,000) to PTA each year, just like pensions. Strangely enough, this has piqued the insurers' interest, and the resulting competition is driving premiums down. Couple this with the tax relief and, although you won't save on all of the tax paid (PTA costs more to process than traditional life assurance) a basic rate taxpayer can still save up to 15% compared to a standard policy, with a higher rate taxpayer saving up to 35%. In fact, a survey by Money Management found that a 29-year-old male who pays higher-rate tax could pay just £6.14 a month for his £150k, 25-year PTA policy with Standard Life - 36% less than their traditional life assurance policy.

Of course, things are rarely as simple as they seem and there are a number of points you should take into consideration before thinking about switching to a PTA policy.

Lifetime Allowance

For a start, the lump sum from PTA counts towards your lifetime allowance for pension contributions, which is currently set at £1.5m. So if this lump sum, when added to your pension pot equals more than this sum, you will be taxed at 55% on the excess. Of course, this probably wouldn't be relevant for that many and it would be your dependents, not you that would be taxed as it would come from your estate. You can also choose to reduce this charge by selecting a PTA policy that pays an income to your beneficiaries upon your death and not a lump sum.

Comparable Cover

Unlike traditional life assurance, PTA cannot be combined within the same policy as Critical Illness cover, Family Income Benefit or Income Protection. You should therefore check how much it would cost to potentially replace any existing policies - the savings made from PTA could easily be negated. Likewise, should your current policy offer "waiver of premium" (meaning your payments will be made if you are unable to work) you should be careful to find a PTA policy that offers the same, should you wish to continue this cover. Liverpool Victoria is also currently the only insurer to offer joint husband and wife PTA policies. And it's worth remembering that if your health has deteriorated since you took out a life insurance policy, you could find that PTA premiums would be higher, even with the tax relief.

Non-earners

All non-earners can contribute up to £3,600 each year to their pension. However, by having a PTA life policy would mean you would be using up some of this precious allowance. For this reason it is usually best for non-earners to stick to traditional life assurance policies.

Future of PTAs?

And an important note to consider is what you would do if you needed to cancel the policy in the future - after all, who knows what future Governments will do regarding the tax relief? Although there are providers that allow you to switch back to your old life insurance policy and premiums without a medical, a number of them including Legal & General, Liverpool Victoria and Scottish Equitable will impose new rates. If you don't check carefully you could therefore find the savings you made from your PTA policy completely negated - and you could even effectively lose money.

So if you're interested in switching to Pension Term Assurance, it is vital to check the policy details carefully as not all policies are the same. And whilst it can be seen that Pension Term Assurance is not necessarily the most flexible product out there with the most features, it can shave around a third off the price of your life cover.

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