Key-Man Insurance

Directors beware!
Key-man insurance policies are becoming increasingly popular (or are increasingly being demanded by banks), but the tax treatment of the premiums payable and the proceeds receivable is far from straightforward. Traps await the unwary!
How do we define “key-man” insurance?
A “key-man” insurance policy is one taken out by a business on the life of key-worker to provide it with funds to protect it from the financial consequences of the key-worker dying or becoming incapacitated. The premiums are paid by the company and the proceeds will be receivable by the company, but it is the key-worker’s life (or health) that is insured.

 Tax trap 1

If the policy proceeds are not payable to the company, but are payable to the keyworker’s estate or family, that is not a key-man policy and the premiums will constitute earnings on behalf of the key-worker and PAYE liabilities will arise. If the payments are not declared the back tax and NICs can be considerable when discovered by the Inland Revenue.

Tax trap 2

Assuming one is dealing with a true key-man policy, there are no PAYE or benefit in kind problems as no benefit accrues to the key-worker or his family. The company should be able to claim a corporation tax deduction, but – here comes the next tax trap – this might be denied if the key-worker is also a substantial shareholder in the company.

Tax trap 3

If the policy was taken to provide a financial “cushion” from the loss of the key-worker, then the proceeds will be taxed as if they were a trading receipt. It is often mistakenly assumed that if tax relief on the premiums is not claimed, then any proceeds receivable will be tax-free. This is not correct as the Inland Revenue has win-win rules. The taxability of policy proceeds is dependent upon the nature of the policy, not on whether a tax deduction is allowed (or claimed) in respect of the premiums. If the premiums are allowable as trading payments, the proceeds will inevitably be taxable as a trading receipt – but the reverse is not necessarily true.
So take care!
It can be seen above that it is quite possible for premiums not to be tax deductible, but for the proceeds to be taxable! These proceeds will usually be quite large, so the tax liability arising could be significant. And if the intention is to pass the proceeds to the key-worker or his family, double-taxation could arise.

Top Tips

• Decide who the intended beneficiary is to be. If it is the keyworker or his family, the policy should be in his name and the premiums should be paid by him out of taxed income.
• For a true key-man policy, consider whether the premiums might not be regarded as “wholly and exclusively” for the company’s trade (e.g. if the key-worker is a major shareholder) and therefore not tax deductible.
• Ensure that policies do not attain a surrender value (e.g. endowment policies) as such premiums will be capital in nature and gains will be taxable.

Top Tips is designed to be a simple and useful source of ideas and information for clients and contacts of Jigsaw CFM. If you are unsure about the implications of any idea contained therein please contact Jigsaw CFM. Jigsaw CFM cannot take responsibility if the ideas are implemented without its involvement.

Delays and extensions the name of the game for 2012 reforms

The Government has issued amended draft regulations today regarding the 2012 pensions reform changes, with further delays and extensions the common theme.

The final rules for the Government’s pensions reform were put before Parliament on Tuesday January 12, 2010, and featured several changes to the draft regulations following a consultation on the original draft in autumn 2009.

The 2012 pensions reforms will now see those who employ less than 50 workers not having to automatically enrol workers into a qualifying pension scheme until sometime between March 2014 and February 2016. New companies setting up after 2012 will also have the time until they need to enrol staff extended, to some date between March and September 2016. Originally, small employers would have taken on their duties in groups at some point between October 2013 and April 2015, and new companies established after October 2012 would have had to enrol staff between April and October 2015.

As well as delays, the amended reforms also feature extensions, with the time that new employees have to be enrolled onto the scheme increased from 14 days to within one month of starting work. The employee is then entitled to a further month in which they may opt out and be treated as never having enrolled as a member. This timescale and process will apply to all types of pension scheme.

The Government’s current ‘19-day rule’, in which time employers must pass pension contributions onto the scheme, has also extended to allow the employer to hold onto contributions for new joiners until the end of the second month. This takes into account the possibility of an employee opting out, and makes reforms simpler, quicker and cheaper for those who do decide to opt out.

The final amendment regards the Government’s recently re-branded National Employment Savings Trust (NEST) scheme, which will not be allowed to accept transfers from other pension schemes, nor allow member to transfer out, in an effort to ensure the scheme is targeted at low and medium earners without any pension provision. Workers will, however, be eligible to transfer these benefits to another regulated pension scheme from retirement age of 55 onwards.

“The changes announced today show that the Government has listened to businesses,” commented Katja Hall, Confederation for British Industry (CBI) director of employment policy. “However, discussions are still taking place about how these reforms will affect firms with existing pension schemes. The Government needs to ensure it does not make the system too onerous for companies who are already doing more than the law will require, or it could encourage them to cut contributions to the legal minimum.”

Andrew Tully, senior pensions policy manager at Standard Life, added: “It is positive that the Government has taken on board employer and industry concerns, and amended their original proposals. Having the same process for trust and contract schemes aids simplicity. And allowing employers more time before they have to pass contributions will reduce the number of refunds which need to be made, saving cost and complexity.”

Source:  Sophie Baker      Pensions age

SSAS clients face tax shock

NEST in a nutshell and FAQs

Five need-to-know facts about NEST:

• NEST is the permanent name of the new national workplace pension scheme being launched in 2011 that is designed to meet the needs of low-to-moderate earners and their employers.
• NEST will be one of the schemes employers can use to fulfil new duties under the workplace pension reforms due to come into effect from 2012.
• NEST will be a low cost, easy to use, online pension scheme that is open to any employer.
• NEST will be run by a not-for-profit trustee corporation called NEST Corporation.
• NEST’s name and logo were developed after an extensive programme of research that involved more than 3,200 jobholders, employers and people who advise employers about pensions.

Read the frequently asked questions about NEST here (PDF, 45kb)

Source: Personal Accounts Delivery Authority

Retirement Age “Should be Scrapped”

Equality commission says an ageing population and increased willingness among older people to work should see default retirement age scrapped

The government will reassess enforced retirement over the coming months. Photograph: PR/Asda

Workers should be able to stay in their jobs beyond the age of 65, and employers should be incentivised to allow older employees to work flexibly, the UK’s equality watchdog said today.

The Equality and Human Rights Commission (EHRC) said the ageing population and an increased willingness to work among older people meant it was time for the government to scrap the default retirement age, a law which allows firms to force staff to finish work at 65.

It said scrapping the rule would remove the “safety net” for employers and encourage more radical approaches to issues such as flexibility, handling the performance of workers of all ages, and improving occupational health.

Hand-in-hand with this change, EHRC said, the government should extend the right to request flexible working to all employees and consider introducing incentives for flexible employers, with a particular emphasis on the over-50s.

The commission said the economy “would be the biggest winner” from the proposed changes, with research from the National Institute of Economic and Social Research suggesting that extending working lives by 18 months would earn Britain £15bn.

The government is currently looking into changes to the rule, and has indicated it could eventually scrap it entirely.

A survey of 1,500 workers by the commission suggests a rule change would be welcomed by many workers. It found that 64% of women and 24% of men wanted to remain economically active after the state pension age (currently 65 for men and rising to 65 for women by 2020).

Around 60% said they wanted to continue working but on a part-time basis, while 40% said they would like to stay in their current jobs but with greater flexibility in hours worked.

The commission’s deputy chair, Baroness Margaret Prosser, said it was time to move away from systems put in place when people died not long after reaching state pension age.

“Britain has experienced a skills exodus during the recession, and as the economy recovers we face a very real threat of not having enough workers – a problem that is further exacerbated by the skills lost by many older workers being forced to retire at 65,” she said.

“Keeping older Britons healthy and in the workforce also benefits the economy more broadly by decreasing welfare costs and increasing the spending power of older Britons.

“Our research shows that to provide real opportunity to older workers, abolishing the default retirement age needs to be accompanied by a concerted drive by government, employers and agencies to meet the health, caring and work needs of the over-50s to enable them to remain in the workplace. Greater flexibility can help to deliver this.”

A spokesman for the Department for Work and Pensions said the government’s long-term aim was to consign fixed retirement ages to the past.

“We have already committed to bringing forward our review of the default retirement age to this year. We are taking evidence now from business and individuals on the impact of retirement ages,” he said.

“Our review will reach a decision after full consideration of the evidence on whether the default retirement age is still appropriate.”

Source of article: http://www.guardian.co.uk/money/2010/jan/25/retirement-age-scrapped-equality-commission

New Compulsory Pension Laws

New laws set up an additional state pension system, known as “personal accounts”, run by an independent body.

The system introduces compulsory pension saving for employees not already members of good company pension schemes. Employers as well as staff will have to make contributions, to improve the level of pension saving in the UK.

There will also be automatic enrolment, and compulsory employer contributions, into existing company pension schemes to encourage fuller take up.

The new system will be operational from 2012 and employees compelled to join the scheme unless they already have a good workplace pension, or choose to opt out.

Contributions will be paid on earnings between £5,000 and £33,500 p.a. and there will be an annual ceiling on total contributions of £3,600. People will not be able to transfer funds from existing pension plans, while contributions will be collected centrally and paid into a choice of investment funds

Personal accounts are part of a wider pension shake-up involving a raising of the state pension age to 68. Staff will pay in four per cent of their salaries and employers three per cent, with an extra one per cent from the Government in the form of tax relief.

Ministers hope that by introducing automatic enrolment they will overcome the barrier of inertia, which is one of the reasons why people do not save enough for their retirement.

About seven million workers are not putting enough away for their old age and the new system will encourage savings from low to moderate earners in particular.

Age Concern said: “We are glad the Government has taken up the Pensions Commission’s recommendations for automatic enrolment into this scheme. However we also want it to invest in providing good quality information and advice about pensions and savings, to help people make informed choices on saving for retirement.

But critics say the Government’s attempts to increase incentives to save for retirement are totally undermined by its obsession with means-testing.

“Many people on low to middle incomes will think twice about setting aside money for old age when Labour’s massive increases in means-testing means that they would simply be saving money for the Government rather than themselves,” said Liberal Democrat spokesman Danny Alexander

And the National Pensioners Convention, Britain’s biggest pensioner organisation, said the Bill would commit a generation of low paid workers to a private pension scheme that could not guarantee they would be above the level for means tested benefits when they retire.

“The money spent on such a financial gamble should be used to strengthen the state pension system rather than unreliable private pensions which lacked public confidence and credibility,” it said.

source: http://www.telegraph.co.uk/news/newstopics/politics/1568488/Law-brings-in-compulsory-pension-saving.html

Changes to the State Pension from 6 April 2010

The State Pension is changing from April 2010. This means more people will qualify for a full basic State Pension. Find out about the most important changes and what they will mean for you.

Qualifying for a State Pension

From April 2010, the way you qualify for a State Pension is changing:

• it will be easier for parents and carers to build up qualifying years of National Insurance and get a State Pension
• to get a full basic State Pension, you will only need 30 qualifying years of National Insurance contributions

(At the moment, men normally need 44 years and women 39 years.)

• once you have built up a single qualifying year of National Insurance you will qualify for at least some basic State Pension

If you’re over 55, or if you care for someone, you should find out how the changes may affect you. You should also find out if you need to take action now.

Source: http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/DG_069498

UK Economy Emerges From Recession

The UK economy has come out of recession, after figures showed it had grown by a weaker-than-expected 0.1% in the last three months of 2009.

The economy had previously contracted for six consecutive quarters – the longest period since quarterly figures were first recorded in 1955.

There have been recent recovery signs – last week, UK unemployment fell for the first time in 18 months.

The UK’s had been the last major economy still in recession.

Europe’s two biggest economies – Germany and France – came out of recession last summer. Japan and the US also emerged from recession last year.

‘Below expectations’

“We can say that Britain has just crossed the line in coming out of recession,” said BBC chief economics correspondent Hugh Pym.

“It [the growth figure] was below analysts’ expectations. The figure could be moved down, or indeed upwards.”

 How the ONS announced the UK had emerged from recession

Our correspondent said the move out of recession had been greatly boosted by the government car scrappage scheme.

Joe Grice, from the Office for National Statistics (ONS), said the UK’s production and service sectors each grew by 0.1% during the quarter.

The ONS figures also showed that GDP fell by a record 4.8% in 2009.

“The Q4 GDP figures are a major blow to hopes that the UK economy had emerged decisively from recession in Q4,” said analyst Jonathan Loynes at Capital Economics.

“No doubt some commentators will claim that the figures are under-estimating the true strength of the recovery and will be revised up in time.

“That is certainly possible. But it won’t change the big picture of an economy still operating way below both its pre-recession and trend levels of output.”

‘Frail’ recovery

The UK recession began in the April-to-June quarter of 2008, and was the longest UK recession on record.

During 18 months of recession, public borrowing increased to an estimated £178bn, while output slumped by 6%.

After the GDP figures were published, John Wright, chairman of the Federation of Small Businesses, said that the recovery remained “frail”.

In order to strengthen the recovery it is important that we boost consumer confidence and demand and that interest rates are held steady as continued investment in the economy will be the key to ensuring a sustainable recovery,” he said.

Meanwhile, Lee Hopley, chief economist at manufacturers organisation EEF, said: “Whilst today’s data confirm that manufacturing is now out of recession, they also continue to raise questions over the health of the wider economy.

“The trajectory for the recovery, particularly in the next six months, is an uncertain one and the best prospects remain an export-driven turnaround.”

First estimates of how the economy has performed are made with about 40% of the data available, and Investec economist David Page has warned there is “plenty of room for surprises” in the figures.

But the BBC’s Economics Editor Stephanie Flanders said: “Even with some revision – in fact, even if it turns out that the economy actually started top grow in the third quarter, given that the first estimate of a decline 0.4% has already been revised up to -0.2% – we are still talking about an extremely lacklustre recovery.”

‘Staggering’

Chancellor of the Exchequer Alistair Darling said he was now sure that “we are on a path to recovery.

“I’m confident but I’ll always remain cautious”.

But Shadow Chancellor George Osborne told the BBC that the UK needed a “new model of economic growth” under a Conservative Government.

He added: “Let’s be clear – this is about as weak growth as you can get.”

Liberal Democrat Shadow Chancellor, Vince Cable said the markets would be surprised that growth had been markedly slower than expected.

“Far from the quick recovery the chancellor has been praying for, the economy is only just staggering back into growth,” he said