How can excepted group life assurance schemes help you?
The pension tax regime imposes limits on the value of savings that can be built up in registered pension schemes each year and over the course of a…
The lifetime allowance
The pension tax regime imposes limits on the value of pension savings that an individual can build up in registered pension schemes (with the benefit of tax reliefs) each year and over the course of a lifetime. These limits are known as the Annual Allowance, and the Lifetime Allowance (LTA).
While there are no limits on the amount which can be paid into an individual’s pension arrangements over the course of a working life, the LTA is the maximum amount of pension savings that an individual can build up in all of their registered pension schemes without incurring a tax charge.
Before 6 April 2012, the LTA stood at £1.8m. However, the LTA has been gradually reduced over time to the current limit of £1m which applies from 6 April 2016 (unless an individual has LTA protection which enables them to retain previous LTA limits).
The test against LTA is normally assessed at the date that any of an individual’s benefits are drawn. This is known as a benefit crystallisation event.
Currently, in basic terms, pension savings which exceed the LTA on the date of a benefit crystallisation event will be subject to a one-off tax charge of 25%, and will then be taxed at an individual’s marginal rate. Additionally, any benefits above the LTA taken as a lump sum payment (including lump-sum death benefit payments) will be subject to a tax charge of 55%.
Life assurance schemes and the lifetime allowance
Registered group life assurance schemes
Generally, life assurance benefits (usually lump sums based on a multiple of salary which are paid when an individual dies in service) are provided through an employer’s occupational pension scheme or through a separate group life assurance scheme (both of which can be a registered pension schemes (RPS) for tax purposes).
Any death benefits provided under an RPS will count towards an individual’s LTA, and any lump sum death benefits paid in excess of the LTA will be subject to a 55% tax charge.
Excepted group life assurance schemes
The recent reduction in the lifetime allowance means that a higher number of individuals could face a lifetime allowance charge if death benefits are paid under an RPS.
Excepted group life assurance schemes (EGLAS) fall outside of the registered pension scheme regime. An EGLAS can therefore provide lump-sum death benefits that do not count towards the LTA and that will not be subject to a potential 55% tax charge on any benefits paid in excess of that limit.
Additionally, an individual’s LTA protection can be lost through the payment of premiums to, an RPS. There is no such issue with life cover provided under an EGLAS.
An increasing number of employers are therefore setting up EGLASs as a cost-effective and tax-efficient way to provide death in service lump sum benefits to high earners and individuals who would otherwise be subject to a potential LTA charge (or lose existing LTA protection) if the benefit was provided under an RPS.
The tax advantages of using an EGLAS to provide death in service benefits are summarised in the table below:
|Lump sum death benefit above the available LTA taxed at 55%||Yes||No|
|Unauthorised payment charge||Possible||No|
|LTA protection lost if contributions made||Possible||No|
In order to set up an EGLAS a discretionary trust for a new non-registered life assurance scheme will need to be executed.
An EGLAS must meet a number of specific conditions in order to qualify as an excepted group policy, and the discretionary trust will need to reflect these conditions:
The benefit from an EGLAS can only be paid in lump sum form. Therefore, it is not possible to use an EGLAS to provide dependants’ pensions.
Lump-sum benefits can only be paid for deaths before age 75.
The method of calculating death benefits must be the same for all individuals covered under the EGLAS policy. For example, it is not possible to insure a certain group of employees for a lump sum of three times salary, and another group of employees for a lump sum of four times salary under the same policy. However, it is possible for one EGLAS to hold two or more policies that each provide a different level of benefit to a different group of employees i.e. one benefit formula under each policy.
Death Benefits can only be paid to an individual or charity, and not to any other person covered by the policy (unless that person is a relative or dependant of the person who died).
Tax avoidance must not be the main purpose of an EGLAS. There is some uncertainty about how the main purpose test applies in practice. However, there is no case law on this point. Employers should therefore seek legal advice on this issue before setting up an EGLAS.
The terms of an EGLAS, therefore, need to be carefully considered and drafted to ensure that they meet the requisite conditions; suit the needs of each particular employer; and interact correctly with the associated insurance policy/policies.
The rules and provisions of any existing RPS should also be reviewed, and if necessary amended, to ensure that ‘double’ or excessive benefits do not inadvertently become payable to employees under both the existing RPS and the new EGLAS.
We can provide legal advice and support to help you with all legal aspects of establishing and running an EGLAS, including preparation of the trust documentation; reviewing the insurance policy; advising on tax treatment; supporting trustee decision making on the distribution of death benefits and other matters.