Qualifying policies offer a tax-free home for extra cash
Qualifying insurance policies were once a popular tax-saving tool, but now Chancellor George Osborne has opted to cap the investment, are they still worth recommending to clients?
These investments took a battering some years back, when they lost favour with savers in the mortgage-linked endowment mis-selling scandal and as tax-free saving plans like PEPs and TESSAs hit the scene.
The benefits of a qualifying policy to a client is no income tax or capital gains tax (CGT) is paid on investment gains from within the insurance cover.
Basically, these life insurance policies work in the same way as investment funds, but have to meet some rules to retain their tax status.
To qualify, the policy has to:
• Accept regular premiums paid annually or monthly that amount to more or less the same sum. So the client pays in £50 a month or £600 a year, but generally cannot vary the amounts.
• The policy term should be no less than 10 years
• The policy should have level life cover set at no less than 75% of the premiums paid over the term
For investors, the policy offered life cover and a tax-free savings plan, providing the cover was not cashed in before 75% of the term had expired.
From March 21 (2012), the Chancellor has capped payments into a qualifying policy at £3,600 a year. Clients can pay more, but they lose the tax status on their investment.
The limit is for all qualifying policies held by an individual – but any started before March 21, 2012, are excluded.
The opening for IFAs recommending qualifying policies to clients is small – most clients will use up their ISA tax exemption first, but if they still have available cash looking to grow tax free, then one of these policies may well be worth considering, especially as life cover is offered as well.