Pension changes – what’s the impact on employee group life cover?
Excepted Group Life Policies remain attractive despite removal of the lifetime allowance charge
Should you review your group life cover?
In certain circumstances, ‘death in service’ payments to employees’ dependants can be subject to tax, leaving them with less financial support at a difficult time. Some employers therefore provide group life cover using Excepted Group Life Policies (EGLPs) which, if properly structured, enable these benefits to be provided tax free. A particular concern for some employees prior to 6 April 2023 (which EGLPs removed), was the risk of death in service payments being subject to a penal lifetime allowance charge. However, any liability to a lifetime allowance charge was removed from 6 April 2023. Some employers may be considering whether it is worth introducing or renewing employee group life cover under an EGLP in light of that change. This article summarises why an EGLP is still worth considering.
When death in service benefits can be subject to tax
Employers who provide ‘death in service’ life cover under which, following an employee’s death, a lump sum equal to a multiplier of salary is paid out, should be aware that any such benefit, if paid directly by the employer, or by an insurer under a ‘non-EGLP’ policy (see below), could be fully subject to income tax in the recipient’s hands.
Prior to 6 April 2023, death benefits provided under a Registered Pension Scheme (RPS), whether alongside broader pension benefits or as a ‘stand-alone’ death benefits scheme, could be wholly or partly subject to penal tax where the lifetime allowance was exceeded. But the lifetime allowance charge did not apply to death benefits paid under an EGLP, making this a more attractive way to provide life cover for employees.
Significant changes to the tax treatment of pension savings were announced at the Spring Budget – including the removal of the lifetime allowance charge from 6 April 2023. This appeared to eliminate the tax charges that could arise from providing employee group life cover under an RPS so removing any benefit from introducing or renewing employee group life cover under an EGLP.
However, the Spring Finance Bill clarified that certain lump sums paid by registered pension schemes (e.g. defined benefits lump sum death benefits and uncrystallised funds lump sum death benefits) will be taxed at the beneficiary’s marginal income tax rate if, prior to 6 April 2023, they would have been subject to a lifetime allowance charge.
Broadly, this will be the case if and to the extent that a relevant lump sum death benefit, when added to relevant pension savings, exceeds £1,073,100 (or any higher limit that applies to individuals with relevant pension protections). This means that the risk of unexpected tax charges arising on certain death in service payments remains for beneficiaries of higher paid employees – and sometimes other employees too - with significant pension savings.
Providing employee group life cover using an EGLP therefore continues to be an attractive option for employers who wish to provide their workforce with peace of mind concerning their death in service provision.
How can employees and their dependants be protected?
Fortunately, setting up an EGLP – to be held under a trust – is a relatively simple way of preventing a post-death tax charge from arising. Any death benefit paid under an EGLP should be exempt from income tax by virtue of specific legislation.
An insurance policy will be classed as an EGLP provided it satisfies certain statutory conditions – for example, benefits must be calculated in the same way for all employees covered under the policy. There is also a prohibition on one of the policy’s ‘main purposes’ being tax avoidance. It would be difficult to see how this could normally be the case as, whilst adopting an EGLP could be seen to have tax efficiency as a key consideration, the relevant legislation expressly provides for EGLPs’ existence, and therefore as a choice when providing employee group life cover. However, caution should be exercised, and tax advice taken relevant to the precise characteristics of the target employee population and overall reward offering for death in service benefits.
What else should employers consider?
Employers will also need to take various other considerations into account, for example:
- Will more than one EGLP be required (bearing in mind the requirement for benefits to be calculated in the same way for all employees covered under the policy)?;
- The fact that EGLPs (unlike RPSs) do not enjoy a general exemption from Inheritance Tax (IHT) – whilst IHT will not necessarily be incurred, unless care is exercised an IHT charge could arise in certain circumstances (e.g. at the 10-year anniversary of the trust’s creation);
- The corporation tax position; and
- The fact that any salary/bonus sacrifice arrangement, in return for increased levels of life cover, could potentially complicate matters (e.g. the optional remuneration arrangement taxing rules).
An EGLP is potentially a very attractive way of providing life cover, usually justifying the extra administration and costs involved. But caution should be exercised, both to ensure that a qualifying EGLP is indeed established and also to minimise residual adverse tax consequences (under the IHT ’10-year anniversary’ rules or otherwise).
Please contact the authors, or your usual KPMG in the UK contact, if you would like to discuss EGLPs further.