Solutions to cover the protection spectrum

1. Solutions to cover the protection spectrum Business Assurance workshop

2. Sections Welcome and introduction The Business Protection solution PruProtect product spectrum 1 2 3

3. Sections Welcome and introduction The Business Protection solution PruProtect product spectrum 1 2 3

4. 1. People are living longer but in ill-health 2. Increased burden on the individual 3. Regulatory change 4. Increase in owner managed business 5. Change in health and wellness Key trends impacting protection

5. Key trends impacting protection 1. People are living longer but in ill-health Increasing need for protection cover 2. Increased burden on the individual Opportunity for intermediaries 3. Regulatory change 4. Increase in owner managed business New markets 5. Change in health and wellness

6. 7 new opportunities Personal Protection Business Protection • Business Cover • Relevant Life Policy • Accelerator • Family Income Cover • Education Cover • Whole of Life Cover Vitality Plus Helping you cover the full spectrum of your clients’ needs

7. Business Protection, an opportunity • Opportunity to grow your business financially through new revenue streams. • Opportunity to differentiate yourself from the rest of the market. • PruProtect is committed to supporting you as we enter a new market together. Are you open for business?

8. Understanding the business protection market Sole traders = 25% of total Partnerships = 16% Corporate business = 59% of total business • Recession stimulates SMEs: encourages entrepreneurial owner managed businesses • SME footprint: 4.8 million business enterprises in the UK at start of 2008 • March 2010: 2.10 million enterprises registered for VAT / PAYE • SME growth rates: Over 500,000 people start up their own business every year • SMEs are significant economic contributors: employ 60% of the private sector workforce Source – BIS Department for Business Innovation and Skills 2010

9. Business Protection – taking the next step • A large and potentially lucrative market • Need to stimulate client into action • Need to categorise market • Need to understand the business solution • Need to know how to apply those solutions Showing you the money

10. Three Key Questions • What are the barriers? • Why isn’t more business being done? • How can we change this?

11. 1. What are the barriers?

12. 2. Why isn’t more business being done? Important Unimportant Urgent Non-urgent

13. Success in the protection market requires proactivity Anxiety = Action Creating a clear picture of the consequences of not acting • Make it:Real Relevant Accurate Professional Who dies leaving a dependent family With a serious illness/ disability As a survivor

14. How can we change this? Accountant Own business Solicitor Adviser Who dies leaving a dependent family With a serious illness/ disability As a survivor creates solution arranges for implementation / execution through

15. What do you add? The value of advice... Creates solution Explains risk Assesses and establishes risk Understands client and client objectives

16. Understanding & Clarity: The key to the business market How to get ‘business risk’ on the agenda How to explain (and prove) “what would happen if...” How to construct legal and tax effective solutions How to deliver the solutions How to communicate

17. Creating a solution to meet your client’s objectives with maximum tax efficiency Business Protection planning • Protection objective: • Right money • Right hands • Right time • However, as with all financial planning, providing cash is only half the story. • That cash needs to be provided at the right time and, to be tax efficient, in the right way.

18. Why your clients need your help Business • Need cash to meet: • repayment of loans • loss of profits • recruitment • loan accounts Continuation Solution

19. Why your clients need your help Succession Solution Business • Need cash to meet: • repayment of loans • loss of profits • recruitment • loan accounts • Need cash to enable: • purchase of share of deceased / ill owner Continuation Solution

20. Why your clients need your help Succession Solution Relevant Life Cover Business • Need cash to enable: • purchase of share of deceased / ill owner • Need cash to meet: • repayment of loans • loss of profits • recruitment • loan accounts • Need cash for: • family of key employee on death Continuation Solution

21. The PruProtect Solution

22. The PruProtect solution Guidance and tools Trusts Option agreements Appropriate for: • Sole trader • Partnership (or limited liability partnership) • Limited company Offering a complete solution

23. The PruProtect Solutions • PruProtect Plan – Life Cover & Serious Illness Cover(Discretionary Trust) • PruProtect Business Protection Plan – Life Cover & Disability Cover for Business (Business Trust) • Relevant Life Cover – Life Cover only(Discretionary Trust for use with a Relevant Life Policy)

24. Terminology – getting you started • Gift With Reservation (GWR) • Previously Owned Asset Tax (POAT) • Inheritance Tax (IHT) • Nil rate band (325K) • Chargeable Lifetime Transfer (CLT) • Income Tax (20% / 40% / 50%) • Corporation Tax (26%) • Capital Gains Tax (28%) • Entrepreneurs relief (reduces CGT to 10%) • VAT registered companies (73K trading income) • Business property relief (own company for 2 years can pass on to family without IHT as no transaction has taken place)

25. Sole Trader

26. Business Continuation – Key Person Cover Death Incapacity The Sole Trader: • The most key person • But frequently it is protection for family/dependants £ £ £ £ Familyand dependants Owner

27. Why your clients need your help Business • Need cash to meet: • repayment of loans • loss of profits • recruitment • loan accounts Where does the money come from if something bad and unplanned happens giving rise to financial loss? Continuation Solution Owner Employee

28. Key Person Cover • An insurance policy taken out by a business to compensate that business for financial losses that would arise from: • the death • or extended incapacity of the member of the business specified on the policy. • The aim is to compensate the business for losses and facilitate business continuity. • An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company.

29. Do I need Key Person Cover? Ask the following questions:  • If they went tomorrow would there be a negative impact on the business? • What effect will this have on clients, sales, turnover and profit? • Do they have a unique skill or knowledge that cannot easily be replaced? • Is there someone already on the team who could do their job? • If there is a team member who can take over, who will do their job? • Will you have to recruit a replacement? • If you have to recruit how much will it cost, how long will it take and how will you pay them?

30. Policy Death Benefits Cover on the life of a Sole Trader A question of protecting (compensating) the family on death. Discretionary Trust

31. Cover on the life and serious illness of the Sole Trader Split trust to meet serious illness and death benefit needs: Policy DB SI • NB: • MPA • PLC • No: • GWR • POAT Trust Life Assured Beneficiaries

32. Sole Trader Example Owner Business Child A

33. Sole Trader Example Owner Policy Business Trust Child A Spouse

34. Sole Trader Example Owner Policy Policy Business Trust Trust Child A Spouse Child B/C Or one policy in one Discretionary Trust with a Letter of Wishes

35. Tax Considerations • Premiums not deductible • Premiums are gifts for IHT but; • £3,000 annual exemption • normal expenditure out of income exemption • Taxation of the policy proceeds • Usually completely tax free

36. If an employee is key? Owner Deductible Taxable/Tax Free? POLICY Key Employee

37. Sole trader - Summary Will the business continue on death? No Yes To employees Possible buy out need – life of another policy and/or policy in discretionary trust as family compensation To family member? Financial compensation for other family members-policy in discretionary trust Financial compensation for family – policy in discretionary trust

38. Partnerships

39. Partnerships – Two key needs Business continuation Business succession Money for the continuing partners to “buy out” a deceased or seriously ill partner Cash for the business on the death or illness of a keyperson

40. Partners as key people • When Partners are key…? • remember a partnership is not recognised as a separate legal entity • each partner effects own policy under business trust • surviving partner(s) make loans to the business to cover the business need Business continuation Cash for the business on the death or illness of a keyperson

41. Partnerships Business Continuation Solution A • Premiums – not deductible • Sum assured – tax free P Trust Business £ C £ B £ Partners’ loan

42. And if employees are key? Partners • Premiums – deductible • Sum assured – taxable A Key employee The Anderson tests Policy Life of another

43. Anderson Rules – how are premiums taxed? Sir John Anderson – Chancellor of the Exchequer 1944 • Employer / Employee • Cover loss of revenue / trading profits / income • Reasonable sum assured • Short / Reasonable term (originally 5 years however HMRC accept retirement age as reasonable) Note: Must satisfy Anderson rules for tax relief on premium No premium tax relief if: • Policy set up to cover a loan (Capital loss) • Major shareholder (above 5%)

44. Partnership Continuation Summary Who is key? Partners Employee(s) • Determine potential cash need • Loan repayment • Profit replacement • Other • Use guidance • Use tools • Use guidance • Use tools • LOA policy • No trust required • Own life policy • Business trust

45. Completing the picture – LLPs • Limited Liability Partnerships • Common in accounting and legal practices • Liability is the same as companies ie: limited • Taxed as partners are: LLPs (Separate legal entity) As for companies As for partners

46. Limited Liability Partnerships - An option • Premiums – non deductible • Proceeds – tax free LLP Benefits Policy on Life of Key Person • LLP recognised as a separate legal entity therefore has contractual capacity • LOA policy (Life of another) • No trust required

47. Partnerships – Two key needs Business continuation Business succession Cash for the business on the death or illness of a keyperson Money for the continuing partners to “buy out” a deceased or seriously ill partner

48. Partnerships – Business Succession Business succession Money for the continuing partners to “buy out” a deceased or seriously ill partner What needs to be covered: Simply the value of the shareholding.

49. Policy in Discretionary trust Son No IHT BPR Spouse or non-business relatives: IHT efficient Partner (Father) Business Interest Family Partnership Succession Example: Father and son business Normally a question of compensation

50. Partnerships agreement Buy / sell • Buy out on death (or serious illness) • Continuing partners retain ownership • Deceased partners family receive financial compensation • So that……. • Surviving partners/shareholders can continue the business without unwanted or unqualified interference from third parties. • The deceased’s estate receives monetary value of the shareholding as recompense