The protection gap - life assurance and pensions

17 January 2012

We have previously commented on various aspects of the 'protection gap'; the difference between the amount of life assurance and income protection people have and the amount that they actually need.

Many leave the provision of life assurance and pensions to their employers, although unfortunately they do not consider whether, in the event of a claim, the benefits provided would be sufficient to allow a reasonably comfortable lifestyle to be maintained.  
 
Most people in employment or self employment have life assurance that will provide a lump sum (typically 2 – 4 x their annual income) in the event of their death before retirement. Insurance industry statistics indicate that there is a much higher probability of an individual having an accident or suffering ill health that leads to long term absence from work. Insuring against the resultant loss of income from this is much less common.  

Adequacy of cover - assets and insurance 

In the event of death, the value of any life assurance policies can be added to the value of any pension funds, savings and investments. It is currently considered that drawing an annual income equivalent to 4 – 5% of the aggregate value of pension/ savings/ investments should be sustainable over the medium to long term. 
 
Simply put, if your life assurance/ pensions/ savings are worth £500,000, your next of kin can look forward to an ongoing annual income of £20 – 25,000. This income may or may not be taxable depending on how the funds are invested. 
 
In the event of absence from work most employers would continue to pay salaries for a reasonable period.  If the period of absence was prolonged, then once employer support ended residual income would comprise state benefits plus any pension and investment income. Again, the 4 – 5 % income guideline would apply. 
 
Affected individuals who are well funded could opt for an earlier than expected retirement. Those perhaps further away from retirement, with fewer resources or with significant ongoing commitments, may find themselves in difficulty. 

Insurance options

Additional life assurance can be sought, which can provide an additional lump sum or a tax free income in the event of death.
 
It is possible to insure your income: income replacement insurance (also known as permanent health insurance or PHI) can provide a tax free income benefit of up to 50% of your full salary/ income in the event that you are unable to work for a prolonged period due to accident or illness. The benefit is paid following a waiting period until the first of either recovery and return to work, retirement or death. This is considered a very valuable type of cover as it provides long term income security.   
 
Critical illness cover can also be useful. It provides a tax free lump sum in the event that you survive for a period following the diagnosis of one from a list of specific 'critical' medical conditions, eg. cancer, stroke, heart attack etc.    

The types of insurance described above are unnecessary if you have sufficient accessible assets to effectively self insure. If you have insufficient accessible assets however, then insuring the shortfall is the practical option. 
 
The costs of providing appropriate levels of cover vary widely depending on age, health, lifestyle and the sum assured. 

Family protection is hugely important, but it is not straight forward. There are numerous options and it is very important that you seek professional advice to determine the correct type and levels of cover to suit your circumstances. 

If you would like to discuss your protection requirements then please contact UHY Financial Planning who will be pleased to help.      
 

Keep up to date

We produce a range of informative publications focusing on the latest accounting issues. Click to add yourself to our mailing list.

Subscribe

Latest news

The Small Cap Awards 2014

Sponsored by UHY Hacker Young, The Small Cap Awards will shine a light on the best companies and participants in the small and micro-cap community.
read more...

A chance to come clean about your second income

HMRC have announced a “Second Incomes Campaign”, the latest in a series of opportunities for non-compliant taxpayers to provide details of undisclosed income.
read more...

Aberdeen has UK's biggest increase in disposable income since the credit crunch

The average household disposable income for the UK’s Top 40 towns and cities has risen by just £1,761 over the same period to £14,068. 
read more...

Employment Allowance: Up to £2,000 off your Class 1 NICs

From 6 April 2014, Employment Allowance maybe available to you if you are a business or charity that pays employer Class 1 NICs on your employees’ or directors’ earnings.
read more...

Biggest year for IPOs on AIM since 2007

The Alternative Investment Market (AIM) has delivered the biggest year for IPOs since 2007/8, with the 76 companies that floated in the last 12 months raising £2.2billion.
read more...

Budget 2014: what does it mean for the legal sector?

Of particular note was the confirmation that the new rules applying to LLPs will go ahead from 6 April 2014.  Additionally, there were other announcements that could be of relevance to the sector.
read more...

UK and Ireland have highest death duties of all major economies

The UK government would typically take 25.8% from the estate of an individual passing on assets worth US$3m* to their heirs, well above the global average of 7.67%.
read more...

Budget 2014: what does it mean for the charity and not-for-profit sector?

Amongst the Budget 2014 detail there were some announcements which affect the charity and not-for-profit sector, with some charities in specific benefiting from the proposed budget.
read more...

Banksy's larger than life Lab Rat finally finds home big enough

Banksy’s rediscovered ‘Lab Rat’ painting has finally found a home big enough to house it, and now hangs in our London office.
read more...

HMRC's tax take from Capital Gains Tax investigations jumps by a third this year - hitting record highs

Our research shows buy-to-let landlords and multiple home owners are under particular scrutiny.
read more...

Starting 2014 with a strengthened national presence

We are starting 2014 with a strengthened national presence, following a series of acquisitions, re-brandings and the appointment of new hires.
read more...

Room for improvement in corporate governance reporting

Small and mid-size quoted companies need to focus their governance reporting on what is important and better explain what they do and why they do it.
read more...

Most economically deprived areas bounce back the fastest from the recession

Eight out of the UK’s ten fastest growing areas since 2008 are also amongst the most economically deprived with their economic output far below the UK average.
read more...

Cash still most popular ISA option despite record low interest rate

New money deposited into cash ISAs increased 9.9% in the last year, reaching £30.3bn.
read more...

Academies could be left with a £200 million a year-plus black hole following forthcoming state pension changes

Forthcoming changes to the state pension rules which will increase their employers’ National Insurance Contributions.
read more...

Long term decline in FTSE 100 tax rate comes to a sudden halt

The average effective tax rate of FTSE 100 companies has increased by more than a tenth over the last year.
read more...

National Audit Office has qualified the DfE accounts

The National Audit Office (NAO) has "qualified" the DfE's most recent accounts due to concerns about academies' finances.
read more...

HMRC challenges over Inheritance Tax produce 23% more tax than last year

HMRC brought in an additional £108m through these challenges in the last tax year*, up from £88m in 2011/12.
read more...

UK beaten by key rivals in attracting foreign direct investment

Over the five years since the global credit crunch the UK has attracted FDI equivalent to 13.5% of GDP, compared to a 17% global average.
read more...

AIM trading boosted by nearly 30% as investors flock to market

The value of investors’ trading activity in AIM stocks has risen dramatically in the last few months.
read more...

New tax changes for actors a boon to showbiz producers

New rules allow employers to stop paying national insurance for many actors, musicians and other performers.  
read more...

Hartmann Capital put into Special Administration - UHY Hacker Young appointed as Special Administrators

Andrew Andronikou and Peter Kubik of UHY Hacker Young LLP have been appointed.
read more...

'UHY International Business' Issue 28 - Now available

As a member of the global accountancy network UHY, we introduce the latest edition of UHY International Business – Issue 28.
read more...

Value of AIM IPOs jumps 65% on last year

The number of companies on the Alternative Investment Market (AIM) is growing for the first time in 6 years thanks to an influx of IPOs and a fall in the number of companies leaving the market, accoring to our research.
read more...

HMRC takes £2billion more than targeted from tax investigations to hit new record of £20.7billion

HMRC has beaten its target for tax investigation work by £2billion in the last year, bringing the total revenue it raised through compliance work to a new all-time high, according to our research.
read more...

Number of foreign landlords investing in UK property jumps 6% in just one year - soars past the two million mark

The number of foreign landlords investing in UK property has now passed the two million mark, according to our research. In the last five years the number of foreign landlords has risen by 39%, up from 1.46 m in 2006/07.
read more...

UK amongst the top ranked countries leading the race in harnessing globalisation

The UK is one of the world’s best placed countries in the race to capitalise on globalisation and could be set for positive future economic growth as a result, according to our new research. Our taxation and business advisory professionals in 27 countries rated their economies on several factors including taxation and trade policy, that indicate how internationalised an economy already is and how well positioned it is to take advantage of future globalisation of trade.
read more...

Latest publications

FCA compliance

FSA compliance

Download our brochure for details of how our highly experienced, partner-led team can help with your FCA compliance requirements.
read more...

Auto enrolment: workplace pensions

Our financial management specialists can help assist you in preparing your business for auto enrolment and ensure you comply with all your duties as an employer.
read more...

Compliance services for the legal sector

Our legal sector specialists at UHY have the technical understanding of the SRA Accounts Rules 2011 combined with legal sector experience to enable us to support you with your compliance needs.
read more...

UHY Insights: Cyber Security, March 2014

Following our recent FD Forum we wanted to share with you the UHY Insights paper on Cyber Security which highlights the importance of protecting the critical information assets.
read more...

UHY Hacker Young Associate Accountant Scheme

Designed exclusively for sole practiitioners who want to provide 'big firm' services without employing more staff.
read more...

A new breed of accountant for the new economy

Helping to move you and your business from where you are now, to where you want to be.
read more...

Patent Box

Businesses which have avoided designing their own products in the past now find it an attractive venture.
read more...

Taxflash: Partnership crackdown

If your partnership or LLP has a range of capital and profit sharing arrangements, you will need to review the robustness of your position.

 
read more...

Company Secretarial services

A guide to the company secretarial services that we can provide for your business to help you avoid the pitfalls and to remove the administrative burden of running your company.
read more...

VAT

This document outlines how our VAT specialists can help you navigate through the complex web of rules and regulations.
read more...

About us

This brochure outlines a full guide to the services we offer.
read more...

Family wealth management

Our private client service team consists of highly experience specialists advising on UK and international tax and trust issues.
read more...

UHY service offering to Academy schools

Whether you are thinking of converting to academy school status or have already done so, we can help you with the complex array of issues you will need to deal with from best value audit and accounts to preparation to fundraising and VAT issues.
read more...

Audit and assurance

A guide to the audit and assurance services that our highly experienced, partner-led audit teams can provide.
read more...

Services for trustees and executors

This document outlines the range of private client services that we offer.
read more...

Corporate tax

We offer the full range of corporate tax services that you would expect from a Top 20 national accountancy network, from completion of tax returns and tax compliance to strategic tax planning and complex problem solving.
read more...

Outsourcing your business services

We offer a range of services that can help you with the responsibilities and requirements of running a business. From management accounting and forecasting through to day to day administration.
read more...

Corporate Finance

A guide to private company services that our highly experienced, partner-led corporate finance teams can provide.
read more...

FCA compliance

Download our brochure for details of how our highly experienced, partner-led team can help with your FCA compliance requirements.
read more...

Financial reporting advisory services

This brochure outlines the skills and experience of our business advisory services team, our approach to financial reporting, our credentials and how to take the next step with us.
read more...

Setting up business in the UK

If you are considering the UK as a possible location for your business expansion, we can help you. This document outlines the range of professional services we offer to assist you in the set-up of your UK business operations.
read more...

Taxflash: Partnership crackdown

If your partnership or LLP has a range of capital and profit sharing arrangements, you will need to review the robustness of your position.
read more...

UHY Global Directory 2014

UHY is a world leader in audit, accounting, tax and business advisory services. Download the UHY Global Directory for more information about our global offices and resources.
read more...

Natural resources: Oil, gas and mining sector

Our specialists have been active in the natural resources industry for many years and have experience advising clients across the spectrum of the sector.
read more...

Corporate governance behaviour review

In this report we have benchmarked corporate governance disclosures made by small and mid-size quoted companies against the 2013 QCA corporate governance code.
read more...

Taxflash: Mileage rates - March 2014

HMRC regularly publish approved ‘fuel only’ rates which have, again, changed.
read more...

SMEssentials - Winter 2014

This latest issue of SMEssentials provides articles on capital allowances changes in relation to property acquisition, research and development tax relief, the increase in National Minimum Wage, cyber security and data protection, and support for SMEs overseas.
read more...