Benefits from life assurance policies held within a registered pension scheme will be tested against the member's Lifetime Allowance (LTA). Any benefits which exceed the LTA are subject to a hefty LTA Charge of 55 per cent.
The reduction in the LTA to £1m from April 2016 means the LTA charge will bite for many employees (not just high earners) when death benefits are paid from registered schemes. Registered arrangements are also unsuitable for individuals with protection in place as a result of the falling LTA, such as primary, enhanced or fixed protection. Membership of a registered life assurance arrangement is likely to be treated as continued accrual of benefits, which would result in loss of protection for these individuals.
The risk in both scenarios is employee relation issues which could lead to complaints and/or claims against employers for providing benefits which are unfit for purpose and possibly for breach of contract.
An alternative way to provide life assurance benefits is to set up an unregistered scheme which holds an Excepted Group Life Policy (EGLP). Benefits paid from an EFLP are not tested against the LTA and so there is no risk of members losing protection or having their benefits eroded by the LTA Charge. Employers should not lose out as generally the premiums payable will be treated as an expense and therefore not subject to Corporation Tax.
EGLPs have strict conditions attached and there are some drawbacks. The key points are: members must have the same benefit formula (eg four times salary). This restriction can be managed as unregistered scheme may have multiple EGLPs which offer different benefit structures and benefits are only payable to those age 75 or under and who are individuals or charities.
In addtition, tax avoidance must not be one of the main purposes of the EGLP. Whilst HMRC has not raised any concerns to date, it could declare EGLPs invalid in the future as their popularity increases.
Further, the scheme may be subject to inheritance tax, in the form of Exit and Periodic Charges. These charges can arise on the distribution of benefits by the trustees and on each ten year anniversary of the date the trust was set up. Although expert advice should be taken, in most cases these charges will not apply and where they do, they should not be material (a maximum of 6% on the value of the trust fund above the nil rate band).
The recent surge in popularity of unregistered arrangements and EGLPs shows no signs of abating. All employers should review their life assurance arrangements and associated employee policies and communications to ensure they remain appropriate and fit for purpose for their workforce. Failure to do so risks impacting employee relations and future complaints and possibly claims.
Please note the views expressed in this article are those of the writer.