Excepted group life policies: the devil is in the detail

This article is supplied by Arthur J Gallagher.

Industry insight

Key points

  • From April 2016, the lifetime allowance limit will reduce to £1m, meaning more employees will exceed the allowance and become liable to a potential 55% tax
  • Employers may be considering excepted group life policies to mitigate the effects of the reduction
  • With their 10-year anniversary approaching, it is critical employers review existing excepted group life policy trust arrangements now
  • Unless structured correctly and monitored meticulously, trustees can unwittingly create significant tax liabilities
AJ Gallagher

Chancellor George Osborne used his last Budget of Parliament to announce the third reduction to the lifetime allowance in four years, slashing the limit to £1m, a drastic cut from its peak of £1.8m just four years ago. 

Introduced under the so-called Pension Simplification of 2006, the lifetime allowance limits the total amount of benefits that can be accrued and paid without triggering a punitive tax charge of 55%. But it does not just apply to registered pension savings, it ensnares the value of lump-sum death benefits from any registered group life assurance arrangements. Because employers typically use these to provide four-times salary as a death-in-service benefit, many more employees will be caught by the latest reduction.

“But all is not lost,” I hear you say. “Because 2006 also saw the introduction of excepted group life policies, the benefits from which do not count towards the lifetime allowance.” And you would be right: structured correctly, these can have the same tax advantages as registered trusts without gobbling up the lifetime allowance. 

Many well-intentioned employers have chosen to write their death-in-service arrangements under excepted trusts for this very reason and, given the latest reductions, we can expect a further exodus from registered arrangements to excepted ones.

Tough lessons

But do employers really know what they are signing up for with excepted group life arrangements? Do they trust what it says on the tin? Experience tells us many employers are not being advised in sufficient detail when it comes to the set-up and maintenance of the trusts underpinning these arrangements. 

If someone recently joined a business, they may find they have inherited such an arrangement within the benefit programme they are responsible for running. Do they know the location of the trust deeds and rules? When did they last check them? Do they understand it?

The first thing to know is that anyone saying excepted group life is ”broadly similar” to registered group life is wrong. There are tax and timing implications to consider and review regularly, so do not be caught out by sloppy advice. Know the facts, do not suffer the tax.

Next, employers should know the pitfalls: are they aware of the 10-year periodic charge on undistributed benefits? Can you or your adviser identify the instances that can create a deemed value on the trust? We continue to see many excepted arrangements implemented without full consideration of inheritance tax and ‘relevant property’ issues, which can expose trustees to unexpected liabilities.

Finally, be aware that excepted arrangements cannot be termed as ‘set and forget’: trustees should be prepared to embark on a programme of regular reviews to protect themselves and employees. This should include legislative and lifetime allowance changes, employee communications, on-boarding processes for new recruits and the handling of employees with fixed protection. 

Employers and trustees are not responsible for managing employees’ tax affairs but the risks of failing to implement and monitor excepted arrangements correctly are as bad as the very outcomes they are seeking to avoid by setting them up in the first place. 

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Trusts and taxation are not easy matters to deal with, but can be made easier with effective benefit consultancy and quality legal counsel. It pays to plan ahead. After all, excepted life has many twists and turns.

Graham Yearsley is commercial director at Arthur J Gallagher