Summary

New rules coming into force for the 2006 tax year mean that you can save on life insurance if you combine it with your pension - read on for more details.

Life Insurance. Let your pension save you money on Life Insurance

Author: Anna Richardson

Sounds too good to be true? Well it's a good deal but there's always a catch.

The new rules say that any pension taken out after 6 th April 2006 that can be

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combined with life insurance into a single premium, will be able to offset the pension contribution tax allowance against the cost of the life insurance. So if you pay tax at the standard rate, that's a 22% saving, and if you pay at a higher rate, you'll save 40%.

The reduction will happen automatically, courtesy of the company with whom you hold ( secured loans ) your pension and life insurance policy. That's if you're a 22% taxpayer. If you pay at the higher rate then you'll need to fill out a year-end self-assessment tax return to get the full 40% tax relief.

There are three stipulations:

• You must have both your pension and life insurance with the same company and pay ( unsecured loans ) as one combined premium.

• The combined value of your pension fund plus the amount that your life insurance covers you for cannot be more than £1.5 million.

• You must pay no more than £215,000 a year in combined premiums.

The life insurance savings aren't quite as good as they sound - primarily because the very ( life assurance ) fact that you are buying life insurance from your pension provider will probably mean that you're not getting the cheapest deal on the market. Also, it is likely that you will pay slightly more on life insurance because it is combined with the pension, compared to a standalone policy. The cheapest deals are on the Internet, and seeing as you can't buy a combined policy in this way, you will probably be paying more than the lowest prices available.

The people that will really benefit will be the higher rate taxpayers. The tax savings of 40% will make a big difference. Those that pay at standard rate should probably do their sums first before ( medical insurance ) getting too excited, because the 22% savings may be cancelled out by the more expensive policies. Check out the online competition and get a standalone quote on life insurance to see how much you would pay for that and your pension, compared to the combined cost.

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