A quirk in A-Day tax rules means registered group life benefits count towards the lifetime allowance (LTA). Jonathan Stapleton looks at the problems this poses as the LTA falls
*** AT A GLANCE ***
Firms using registered group life schemes could alter employee tax position for pensions
Excepted policies can provide alternatives but these schemes have disadvantages
Employers and employees urged to take advice over this issue
*** BODY ***
A-Day pension reforms implemented on 6 April 2006 radically simplified the UK's pensions tax regime, merging eight tax regimes into one single regime for all individual and occupational pensions.
But one often overlooked consequence of the reforms was that registered group life assurance policies were caught by new lifetime allowances (LTA), meaning any lump-sum payment on death forms part of the accumulated pension benefit with reference to the prevailing LTA at the time of death.
This rule is causing significant problems for firms that operate registered group life assurance schemes, especially after the LTA was reduced to £1.25m from 6 April this year – a limit which means many more individuals will be caught by this rule.
Furthermore, entering a registered group life scheme would also mean an individual would lose their fixed or enhanced protection.
This is particularly problematic as employers will not know the total value of an employee's benefits from all sources and could accidentally enrol them in a registered group scheme.
Group Risk Development (Grid) spokeswoman Katharine Moxham agrees this is a problem, and notes employers and employees need to be made much more aware of this "potential trap".
However, she says there are alternatives to registered group life schemes, such as Excepted Group Life Policy or a Supplementary Relevant Life Policy, which are exempt from LTA limits.
Moxham says this is becoming increasingly popular among employers, but adds there are disadvantages to the arrangement, including some periodic and exit charges to the policy.
She says: "Some employers are using the excepted route for all their staff just to be on the safe side but this doesn't suit everyone."
Yet, while some employers are using alternative group life schemes, the vast majority are not. Swiss Re's Group Watch 2014 report noted that at the end of 2013, there were a total of 40,813 registered group life policies, but only 2,877 excepted group life schemes.
Moxham urges employers to take advice on structuring group risk: "Above all else, you must take legal and tax advice on this. These are not small amounts of money to make a mistake on."
*** BOX OUT ***
Under fixed protection (2012), an individual's lifetime allowance is fixed at £1.8m. This means a member can take pension savings worth up to £1.8m without paying a tax charge.
Individuals had to apply before 6 April 2012 to get fixed protection and will lose this protection should they make further contributions to a pension or take part in a registered group life scheme.
Fixed protection (2014) works in a similar way but fixes protection at £1.5m. Staff had to apply before 6 April 2014 to get fixed protection 2014.
An individual with enhanced protection does not have to pay the lifetime allowance charge but there are restrictions on what they can do with your pension savings if they want to keep this protection. Individuals needed to have applied before 6 April 2009 to get this protection.
This protection is lost should any pension benefits have been built up since 5 April 2006. It is also lost should an individual enter a registered group life scheme since that date.
Excepted Group Life Policy (EGLP)
The EGLP has similar benefits to a registered scheme. Premiums paid by the employer are normally treated as a business expense and, for employees, the premiums paid are not treated as a benefit in kind.
These policies are usually set up under trust, but are subject to some restrictions - notably that at least two people must be included on the policy; that the EGLP policyholders must be insured for a benefit calculated in the same way (e.g. for the same fixed amount or multiple of earnings); and the policy can only provide lump sums on death so cannot provide any dependants' pensions.
Such restrictions would mean that an EGLP would not generally be suitable for self-selection as part of a flex programme - and periodic and exit charges to the policy can also be a disadvantage.
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