Pension tax changes and group life policies

There are, however, alternatives to group life assurance. To avoid breaching the LTA and triggering a 55% tax charge on the excess, Trustees under an occupational scheme could use the payment from the registered group life plan to buy a dependant’s death-in-service pension (DDISP).

The income paid will not fall into the calculation of the pension saving for LTA purposes, but will be subject to income tax. This, however, places the onus on the trustees to resolve the potential tax issue at a time when they are also dealing with bereaved relatives.

The situation can be further complicated if the deceased’s personal circumstances are less than straightforward: for example, if there are no surviving dependants.
The new lower LTA limit will bring many more people into the reckoning.

While the provision of a dependant’s pension on an ad hoc basis may be an acceptable short term solution, the use of DDISP across the whole workforce is not practical or affordable.

It is impractical, since many of the workforce will be without dependants and will feel unfairly treated. Also, the premium cost not only factors the mortality cost of the employee but also that of the dependant: essentially, the cost is driven by the life expectancy of the dependant.

With increased life expectancy in the UK, these contracts are becoming prohibitively expensive. There are, however, two alternative insured solutions available and both are not governed by Registered Pension limits.

Excepted Group Life Policy (EGLP)

The Excepted Group Life policy (EGLP) has gained ground, since the lump sum paid on death is not counted against the deceased’s LTA. The premiums paid by the employer are normally treated as a business expense.

Partnerships are subject to slightly different tax treatment on premiums, but EGLP can still provide cover for equity partners of a Partnership or LLP. For employees, the premiums paid are not treated as a benefit in kind. These policies should be set up under trust.

The provision is subject to some restrictions:

A least two people must be included on the policy;

The EGLP policyholders must be insured for a benefit calculated in the same way (ie, for the same fixed amount or same multiple of earnings);

The policy can provide lump sums only on death (so cannot provide any dependants’ pensions);

Cover can be written only to a maximum of age 75.

Where an organisation requires different levels of cover for different groups of employees, separate policies will be required. Where the EGLP is issued by the same insurer that provides the registered scheme, the insured will usually be extended the same free cover limit as for the registered scheme. Where the EGLP is not linked, each policy will usually have its own free cover limit, adding to administrative complexity.

The increasing popularity of flexible benefits would mean that EGLP would not provide a practical vehicle for ‘self-selection’, but the following might provide a more suitable contract.

Supplementary Relevant Life Policy (SRLP)

A SRLP is on a single life. As in the case of EGLPs, the lump sum on death does not count towards the LTA. Yet, they too come with contractual restrictions. First, they can be offered only by an employer to an employee. Sole traders and the self-employed cannot use these policies.

Equity partners or members of an LLP can use these contracts, albeit that the tax treatment of premiums is subject to different treatment. Typically, they provide benefits above the LTA and must be written in conjunction with the registered scheme.

Premiums paid by the company are considered by the Local Inspector of Taxes under the ‘wholly and exclusively’ provisions relating to business expenses. The premiums paid are not assessable for tax as a benefit-in-kind for covered individuals. There is slightly different tax treatment for equity partners.

Interestingly, some insurers package these contracts in a way that does accord with the principles of flexible benefits, offering terms that allow the member to choose the level of benefit at outset, and the option to revise cover when the insured meets a ‘lifestyle event’.

The income tax trading act

The Income Tax (Trading and Other Income) Act 2005 lists a number of clear conditions that must be complied with if the arrangement is to be taken out of the chargeable event rules and benefits are to be paid free of chargeable gains and income tax.

The Act is also clear in stating that it is the policy itself that must comply with those conditions, not the trust deed or the rules. In the past, this is a detail that was often overlooked by providers, leaving many schemes non-compliant and at risk of inviting unintended tax liabilities.

The situation has improved a great deal, with most providers heeding warnings and modifying their policy terms to reflect the law.

However, there is still a small but significant handful of providers who continue to offer policies that fall short of what the Act requires, and some of those appear unwilling to change. Without any formal approval process in place at HMRC for these types of arrangement, policyholders who do not obtain appropriate legal advice must satisfy themselves that the policy that they have been advised to obtain meets the statutory conditions.

It is a situation that should be heeded by benefit consultants too, as any subsequently discovered failings in the quality of the policy could, at best, undermine their relationship with their client, or worse, expose them to negligence claims as a result.

In summary, employers should consider replacing the Registered Group Life Assurance with a suitable excepted arrangement. In this way, they will avoid the risk of: