Quitting smoking could halve your life insurance and triple your pension
Today is National No Smoking Day and despite the success of national campaigns such as Stoptober and National No Smoking Day there are still at least eight million smokers in the UK, according to a February 2017 report from Public Health England (PHE).
Smoking is still thought to account for almost 80,000 UK mortalities a year, or around 17% of all deaths in people aged 35 and over according to Professor Kevin Fenton, PHE’s national director of health and wellbeing.
But aside from the health benefits, quitting smoking leads to big financial opportunities.
“More than half a million Britons could get premiums cut”
Tom Conner, director of financial advice firm Drewberry says: “Most insurers don’t look kindly on smokers. Life insurance premiums are generally twice as high for smokers and they rise even higher if you’re still smoking in your 40s. The cost seems especially high for those who admit to being ‘social smokers’ as they’ll pay the full loading even if they only ‘spark up’ a few times a year.
“The loading for smokers with income protection insurance is a little over 25% but, as the premiums are higher in the first place, this also represents a significant additional cost – even for someone with modest insurance cover.
“After a year on the wagon, former smokers can apply to have their insurance re-rated,” explains Mr Conner. “They just need to sign a non-smoker declaration and take a simple test for cotinine, the alkaloid residue left by nicotine, that’s administered by their doctor.
“There’s at least half a million people who could now be doing this and potentially halving the price of their insurance.”
Get an Isa worth £8,000 in two years
With the average packet of cigarettes now close to £10 a pack, smokers who can kick the habit this year have a new source of cash they can use to fund individual savings accounts (Isas) or pensions.
Research by Drewberry found that that the average (11-a-day) smoker who quit a year ago and made monthly contributions to a FTSE 100 index tracker fund in an Isa (instead of buying cigarettes) would now have an investment worth £2,195.05. For someone who smoked a pack-a-day the figure is £3,839.39.
Drewberrry also looked at what someone who stopped smoking two years ago would now have as this would also include the premiums they would start to save on their life insurance.
On this basis, the average smoker who quit back in 2015 could now have an Isa worth £4,882.43 while a pack-a-day smoker could have £8,202.67 in a UK equity Isa.
“Even so,” says Mr Conner, “the most worthwhile home for the sudden new income stream that ‘quitting’ can deliver is probably a pension.”
Smoking quitters who invest the money saved into a pension will go from paying c75% tax on every pack of cigarettes to receiving tax relief back from the government at their highest marginal rate of income tax.
A 27 year old who quits could triple his or her pension
“The average smoker who quits in their 20s and feeds the money they save in cigarettes and insurance premiums into their pension, could easily build a pension pot of well over £260,000 by age 67,” says Mr Conner.
Based on standard industry pension projections Drewberry found that a 27 year-old ‘average smoker’ who quits this year and funds a pension to age 67 could create an additional pension pot worth around £270,400. According to standard pension industry assumptions, this would equate to £102,000 in today’s money or well over triple the current average pension pot at age 65 – a meagre £29,417.
For a 37 year-old, it’s a future pot worth about £171,270, while for someone aged 47 the future pension pot could still be worth over £106,000 or £65,300 in today’s money – more than twice the current average at age 65.
“The chance to transform your retirement prospects is probably the strongest financial argument for quitting,” says Mr Conner, “and if this year’s cohort of quitters are serious about living longer they’ll need to build far better pensions than they have now.”
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Income protection insurance
If you can’t work in the event of sickness or illness, income protection insurance aims to give you an income, with the amount of income set by you up to 75% of your gross (before tax) income with the premiums varying by how much of your salary you want to cover, as well as your age and health and when you want to start receive any payouts. Any payouts from income protection insurance are tax-free and usually continue until you recover, reach your selected pension age or the period of cover specified in the policy comes to an end. Income protection insurance does not cover redundancy but you can buy it as a bolt-on.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.