The Spring Budget: A time to re-think Group Life Assurance design for employers

The announcement confirmed that the pensions “Lifetime Allowance” (which is the cap on tax relievable lifetime pensions savings in the UK, currently £1,073,100 (for the tax year 2022/23) will be abolished from 6 April 2023 for the future.

Currently life assurance cover for employees in the workforce is typically provided by employers under two types of group life assurance policies, called “Registered” and “Excepted” policies. The former Registered policies are classed as Registered Pension Schemes, and the benefits provided under those policies will count for the purposes of the calculation of a person’s Lifetime Allowance where they crystallise on a death in service. The latter Excepted policies are lump sum death benefits and the amount of these benefits when they crystallise on a death in service will not be tested against a person’s available Lifetime Allowance – as they operate outside of the pensions tax system. Excepted schemes are not classed as registered pension schemes, whereas Registered schemes are.

Excepted schemes

Historically employers have operated Excepted schemes to allow selected employees or Board directors to have life cover in the workforce. For high earners and people with pensions tax protections (called enhanced and fixed protections), it was considered appropriate to provide cover under Excepted policies. Indeed placing people with pensions tax protections into a new Registered scheme could damage their tax protections or even cause them to be lost, resulting in tax charges.

To date Excepted schemes have presented employers with uncertain tax risks. Establishing an Excepted scheme must not be for a purpose of tax avoidance – which is a condition placed on these schemes by HMRC without any real guidance on what this means. This has caused many employers to take professional advice around how to establish the Excepted scheme and decide which of its employers/Board directors to admit to participation in the schemes as eligible members. Some employers have switched all employees into the excepted scheme and others have decided to run twin track schemes (with the majority of people in the registered scheme). These tax risks extend to potential Inheritance Tax triggers for the trustees where a scheme is established and members suffer serious ill health on joining and also at the ten year anniversary of the establishment of the trust through serious ill health or where benefits crystallise and are not distributed. There is no real reporting process for such chargeable events and the position falls on trustee fiduciary duties under trust law. Most schemes are run by the employer acting as the trustee, so this can be a headache. That said Excepted schemes are considered legitimate schemes to provide life cover and that is all they do, much like Registered schemes.

What happens in April?

From 6 April 2023 there is no more Lifetime Allowance. For the period of time that this remains the case (Labour politicians have said that they would reverse this if elected to Government), it may cause large insurers which provide the group life assurance policies (both Registered and Excepted), to look at their offering to the market and consider changes. At first glance it seems the need for Excepted schemes will have fallen away. Registered schemes will be still classed as registered pension schemes (the Government has not removed these schemes from the overall tax framework for registered pension schemes for now). But with no Lifetime Allowance and in the absence of some form of grandfathering protection of past limits, there is nothing it seems to test the benefits provided under Registered schemes against. Employers may decide it is simpler to put all employees/Board directors back into the registered arrangements. The need for the Excepted schemes seems to have gone from 6 April 2023 and why take the uncertain tax risks which go hand in hand with Excepted schemes?

Next steps for employers

So what action should employers take now? They should take financial advice from their risk consultants in the first instance. Much will depend on the reaction to these changes by the insurance market and the insurance companies which provide the excepted policies. This is a good moment for employers to review their current arrangements and take stock. As set out above, for risk averse employers this may be a good time to move away from excepted schemes. One word of caution may be what further changes could be made by a new Government after the next General Election? Only time will tell and this may factor in to the decisions made by insurers in the life market now. Perhaps this is a Dad’s Army moment and the words of Corporal Jones spring to mind – “don’t panic Mr Mainwaring”.