UK Life Assurance Benefits: top 10 tips for UK employers
Life assurance benefits are considered a real attraction for UK staff when considering overall remuneration and benefit packages. Benefits are provided typically via a life assurance policy, whereby the employer will seek the services of a risk broker and will pay the premiums for the policy. Here are ten key issues for companies to explore in relation to these arrangements:
1. Are the trust documents up to date?
These arrangements are held under discretionary trusts, so there should be a trust deed and rules in place. Employers should check their records to make sure these documents exist. The golden rule is that the trust documents should mirror the requirements of the policy schedule – in terms of the details of employers and name of scheme. It is common for deeds to be misplaced or lost, and also for the deeds to not keep pace with structural changes with the employer. Insurers ask for proof of the trust on re-broking or on a death claim.
The purpose of the trust is to facilitate payment straight to the chosen beneficiaries free of inheritance tax (which could be incurred if monies are paid to the deceased member’s estate). Failing to prove these trust arrangements could result in issues with HMRC in worst case scenarios.
2. Pension Scheme Tax Reference (PSTR) numbers – Registered Schemes
Insurers also need confirmation that registered life assurance schemes have been registered with HMRC. The employer will need to do this as trustee in most cases, to confirm it is the scheme administrator for scheme governance tax requirements under the Finance Acts. For old schemes pre-dating pension simplification in 2006, the old Pension Sharing Order (PSO) numbers can be converted. Registration is an online process, and this is often looked at together with the need to update scheme trust deeds.
3. Type of scheme
It is possible to have registered schemes and also non-tax-registered life assurance schemes, called excepted or individual policies. With non-registered schemes the benefits must be lump sum in nature only. Importantly, registered and excepted policies cannot be held together under the same discretionary trusts, even if the policies are linked together with the same insurer. They must be held under separate trust arrangements. Many employers run both types of schemes, with registered schemes being the main scheme for most staff, with the non-registered schemes being for senior managers or Board members.
4. Who is the trustee?
It is common for stand-alone schemes to have the main employer as the trustee of the scheme, whether the policy is tax registered or not. The scheme deed and rules should make this clear. Sometimes individual directors may be appointed as trustees – often by mistake with the establishing documentation. This can lead to issues with leavers and the need to amend scheme documentation. Sometimes professional trustees are appointed but this involved the payment of professional fees. This could be an unnecessary expense because the roles and duties of the life assurance scheme trustee are limited really to making decisions on death benefits, which hopefully will not be routine for any organisation. Like with a lot of insurance risks, policies are taken out to mitigate against the risks but hopefully will not be required.
5. Standalone schemes or a master trust?
For some employers the prospect of acting as a trustee is a step too far – for fear of decision making and/or loss of management time in the process. Instead, it is possible to buy a policy which is held under an umbrella trust arrangement, where there is a professional trustee who assumes trustee duties and obligations. This suits some organisations but others want a better choice of insurers should they want to review their policies with their brokers and also want some involvement with the process of paying out benefits.
With master trusts there can be delays with the process and the employer will have no input or control. It may still receive queries from relatives, so there may not be too much time saving. Also, where things go wrong, employers may still be dragged into complaints and/or claims – although all responsibilities will usually stay with the master trustee.
6. Decision-making
For standalone schemes, employers should consider setting up a fair and transparent process for the handling of death claims. This will include understanding the roles of employer and trustee in this process, so understanding how the claims process should be best managed. Employers who act as trustees (the majority of cases) should consider who within their organisation should make these decisions and have a basic understanding of the factors that they should take into account as part of this decision making.
A good process will limit cases where everything goes wrong, and people bring complaints and/or claims for maladministration or breach of trust. Employers should consider taking professional advice in difficult factual cases – where the family structure is unclear, there are minors and/or there are beneficiaries in dispute for an anticipated share of the lump sum monies
7. Beneficiaries under-18
Where beneficiaries are minors (under-18) there may be a need to protect the monies until the person reaches maturity. This will be fact specific but be mindful that if the trustee decision is to benefit the minor, then it will be responsible for that decision – if monies are paid to a parent or other adult acting as informal trustee and the monies are spent, then the trustee could face claims on behalf of the minor down the road. Key factors will be the amount of the lump sum and whether there is already a children’s trust in place.
It is possible to set one up, but hurdles can be:
- whether there are two adults who could act as trustees;
- the practical issues of setting up a bank account; and
- attending to the trust registration process.
These are areas worth exploring in the right circumstances.
8. Do we need a bank account?
Trustee bank accounts can be quite difficult to set up as a lot of banks will not be keen to run accounts with no deposits. Most insurers will wait for the trustee decision on the payment of benefits and will then pay to the advised beneficiary or beneficiaries. There can be difficult insurers who want to pay to a trustee bank account and lump sum monies should not be mixed with company monies. Also, insurers in our experience may be reluctant to pay out to beneficiaries in certain overseas countries where it is difficult to verify their identities – in those circumstances insurers will want to pay the lump sum monies to a trustee bank account so the risks are with the trustees. Generally speaking, setting up an account is not typically required but there can be exceptions to the rule.
9. Ability to switch insurer
Key to the process will be the employer’s ability to scan the market and look to switch to cheaper insurers, to manage the cost of premiums over time. Standalone schemes will have greater flexibility in this regard, but employers should check the scheme rules to make sure that the terms do not restrict the insurer to named insurers. This can be an issue with old scheme documents. This can be sorted through scheme amendments but if left unamended, then this can result in the benefits being uninsured – the insurer may not pay out on a claim and if they do there may be tax consequences.
10. Registered/Unregistered schemes – what to chose?
This will be a matter for financial advice rather than legal advice. With excepted schemes there are further details of regulatory compliance issues to cover off but essentially these remain valid policies for groups of higher earners with your organisation and/or people with maxed out benefits under the UK registered pension regime (as benefits under excepted policies are not tested against the tax limits for registered pension schemes).
How can Blake Morgan help?
Employers will need advice from risk brokers/financial advisers to help set up appropriate life assurance arrangements. This can be a technical area with a lot of jargon at play, but a practical common-sense approach often works wonders.
We can assist with the legal aspects of these requirements, including documentation issues. Contact our Pensions team to see how we can help.
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