06 Nov 2020
Group Life Assurance benefits will pay a lump sum benefit upon death of an insured employee. However, what many people overlook is that traditionally Group Life schemes are written under registered pension scheme legislation and as such, there are instances where an individual can invalidate their pension protection by joining such a scheme.
The Lifetime Allowance (LTA) was created when pension simplification legislation was implemented in April 2006. Benefits which count towards the LTA include registered pension and lump sum death benefits from registered Group Life Assurance schemes. Historically, the LTA was £1.8m but since April 2012, this has been reduced a number of times. For 2020/21, the LTA is £1,073,100. Benefits which exceed the LTA are subject to a tax charge of up to 55%.
Individuals with benefits above or approaching the LTA can apply for pension protection from the HMRC. Since the introduction of the LTA, there are several different types of pension protection which have become available to enable individuals to protect the value of benefits that they have built up (and future benefits that may accrue) from tax charges. If pension protection is granted, these protections are subject to different conditions and strict rules and if broken, the protection will be withdrawn.
A potential issue with registered group life arrangements is when an employee with Pension Protection joins a ‘new’ registered group life scheme due to the fact that they have joined a new employer, the protection may be voided, depending on the type of protection they have and when this was granted. An employer may not be aware of employees who have pension protection in place, as this is arranged on an individual basis. A Group Life scheme is classed as a ‘new’ arrangement if the Pension Scheme Tax Reference (PSTR) number which applies to the scheme changes or a new trust is arranged for a scheme.
The alternative, an ‘Excepted’ Group Life scheme, provide lump sum death benefits outside of the registered pension scheme environment. Therefore any benefits paid are not currently included in the calculation of the LTA. You may wish to consider setting up an Excepted scheme for a defined section of your membership. There will usually be no difference in cost for this type of arrangement and you would need to execute a trust deed prior to implementing the insurance policy.
There are advantages and disadvantages of the way a scheme can be established and managed over another. There are some differences between Registered and Excepted schemes, which include potential tax charges in certain scenarios on an Excepted scheme. If you would like to discuss the different options available and which may be suitable for your business, please do get in touch.