Group Life Newsflash:- excepted schemes
A lot of employers are being advised to consider unregistered group life schemes for their staff for the provision of lump sum death in service benefits. Traditionally employers have provided group life cover for all staff in a registered life assurance scheme. Such a scheme should be properly established under its own trust deed and rules, with the employer also acting as trustee.
The driver for this change in approach is the reduction in the "lifetime allowance" that applies to pensions and death benefits under UK registered schemes. This amount is currently £1m. This would cover all members' benefits under registered group life schemes as well.
Employers need to be alive to these matters as part of their overall remuneration strategy for employees, especially senior hires. New directors or other senior hires may present challenges, in that such people may have tax protections in place because they have already reached the "life time allowance" limits. The terms of these protections may prevent any further accrual of pension related benefits in registered schemes, which would include membership of a new registered group life scheme.
Employers should build into their new joiner paperwork clear warning flags for new joiners, giving the message that where they have pensions tax protections in place to protect against "life time allowance" tax issues, they should take their own independent financial advice over membership eligibility of the employers registered group life scheme.
Employers are able to provide access to other types of group life scheme which fall outside the UK tax framework for pension schemes. These are called "excepted schemes" and "relevant life policies". Excepted schemes must be established for 2 people or more, whereas relevant life policies can be for single lives.
HMRC does not appear to play an active part in relation to the regulation of group life arrangements, whether registered or unregistered. In relation to registered schemes, there is no scrutiny of the trust documentation for these schemes and the only interaction will relate to obtaining a "Pensions Schemes Tax Reference Number".
HMRC appear to show no interest in excepted schemes, even though these schemes come with a clear warning that these schemes cannot be established to avoid tax. It is not clear exactly what this means in practice. As a result employers need to think carefully about the eligibility provisions of their excepted schemes and take appropriate advice to ensure that the scheme is not being established with the purpose of tax avoidance.
Some questions will arise as to which employees should be admitted to membership against these tax risks. For instance, should eligibility be limited to just employees who already have the relevant pensions tax protections in place – these people will be adversely affected if they are admitted to a new registered group life arrangement. Or can the employer widen the category to include employers earning salaries over a certain amount, or just senior employees perhaps. Some employers have chosen to introduce excepted schemes for all staff – this approach may alleviate the eligibility risks but there are other tax risks to consider too.
Excepted schemes also face potential inheritance tax charges which can be triggered at the outset of the creation of the trust in the circumstances where an employee has a terminal illness which creates a latent value for the trust. Similarly tax risks arise at the 10 year anniversary of the trust where a member has a terminal illness or where following a member's death, scheme monies are not distributed.
There are some important matters to work through when thinking about establishing an excepted life scheme. However an element of common practical sense must prevail because as the lifetime allowance shrinks more and more employers will need to think about using excepted schemes as a vehicle to provide group life cover.