An employee benefit or an employee burden?

When you have taken the time to design an employee benefits package to help you attract and retain high quality individuals, the last thing you want is for one of your employee benefits to become an employee burden.

Lump Sum Life Assurance is one of the most common employee benefits in the UK, with over 11.5m employees insured in 2015, an increase of 2.4% on the previous year (Swiss Re, 2016, Group Watch). Often referred to as ‘death in service’, it is a lump sum payment, usually based on a multiple of salary and paid to a nominated beneficiary or as a pension payable to the employee’s spouse or financial dependant.

Lifetime Allowance changes

The Lifetime Allowance (introduced in April 2006) details how much an individual can build up in their pension without incurring a tax charge. In April 2016, the Lifetime Allowance was reduced to £1m. It sounds like a lot, but benefits that count towards the Lifetime Allowance include registered pensions and benefits from registered group life assurance schemes. When combining both benefits, this reduced allowance could have a significant impact on higher-earning employees.

For example: Bob has a pension pot of £600,000 and 4x salary life cover with a salary of £150,000. He may not realise he is impacted by this reduction in allowance, as his pension pot is below £1m. However, if you add in the £600,000 life cover lump sum (4x £150,000) then his actual total pot is £1.2m, meaning that £200,000 (the excess above the Lifetime Allowance) may be subject to tax at 55%. Employees may not be leaving the lump sum they thought to their beneficiaries, which could have been calculated to pay off a mortgage etc.

Benefit protection

Depending on individual circumstances, employees can opt to contact HMRC directly to try to protect their benefits if they feel they are already at, or likely to exceed, the new Lifetime Allowance. However, as an employer, it is worth investigating what you can do to ensure your benefits remain a benefit to employees.

One potential solution is to provide access to a group life assurance scheme but on a non-registered basis. Excepted group life assurance schemes provide lump sum death benefits outside of the registered pension environment and therefore are not included in the Lifetime Allowance calculations.

HMRC has set a number of conditions that need to be met for a policy to qualify as an excepted group life assurance scheme. These include:

  • There must be at least two members in the scheme.
  • Benefits can only be paid as a lump sum on death before a specific age that must not exceed 75.
  • Benefits for all individuals must be calculated on the same basis. This can be either a multiple of salary or fixed benefit. If different benefits are required, additional schemes will need to be created.
  • The policy must not have a surrender value or provide any other type of benefit.
  • The benefits must be payable to an individual or charity. This can be facilitated via a trust.
  • The scheme cannot be used for business protection (ie the benefits must be payable to dependants).
  • Tax avoidance must not be the main purpose for setting up the policy – either for the policyholder or for the beneficiaries.

It is worth noting that there are two possible taxes that may apply to excepted group life assurance schemes (these taxes apply to the trustees of the scheme as opposed to registered schemes where the tax liability falls on the beneficiaries):

  • Periodic charge: at each 10-year anniversary of the scheme, any money held by the scheme could potentially be taxed. So could any lump sum due where a member is terminally ill at the 10th anniversary.
  • Exit charge: a tax could be liable on all payments made through the scheme.

It is our understanding that the above two taxes are unlikely. However, it is always recommended that you seek tax advice before implementing an excepted scheme.

In a world of recruitment and retention it makes sense to regularly review your offering to ensure it continues to work for you and your employees.