HR pensions spotlight – how do you provide death-in-service benefits?
Published on 24th May 2021
We look at how an excepted group life policy (EGLP) scheme can help to solve lifetime allowance problems.
At his Budget 2021 the chancellor announced that, instead of increasing in line with the Consumer Prices Index as expected, the lifetime allowance (LTA) will remain frozen at its current level of £1,073,100 until 5 April 2026. This freeze means that more and more employees could find that their death-in-service payments push them over the LTA, resulting in tax charges. An EGLP could solve this and other LTA problems, but there are points for employers to watch.
What is the LTA?
The LTA is the amount of pension benefits that a member can accrue within a UK registered pension scheme without incurring a tax charge known as the LTA charge. If a member exceeds the LTA when pension savings are taken out (that is, when they retire or die), the excess amount will be subject to a LTA charge of up to 55%.
Do death benefits count?
A pay-out from a registered death-in-service scheme, or a registered pension scheme, counts towards the LTA. This means that death-in-service payments can tip an employee over the LTA threshold, triggering an LTA charge. For example, an employee earning £80,000 p.a. who received a death benefit of 4 times salary would be effectively reducing their tax free allowance (LTA) by £320,000.
Employees may have claimed forms of LTA protection (such as fixed protection and enhanced protection) to safeguard the pension benefits they have already built up. These protections can be lost automatically if the employee joins a registered scheme. There is a particular risk of protection being lost – and a claim being made against the employer - when individuals are automatically signed up to a registered death-in-service scheme (or pension scheme providing death in service benefits) on joining a new employer. These provisions are complex and may depend on the nature of the death benefits provided, so it is important to take advice.
What's an EGLP scheme?
An EGLP scheme is an EGLP policy (a special type of death-in-service policy), held in a discretionary trust supported by appropriate scheme rules. The policy needs to be held on trust to prevent the payment from falling into the employee's estate and triggering inheritance tax. The trust and rules need to reflect the special conditions that apply to EGLP policies.
How can it help?
An EGLP scheme allows lump sum death-in-service benefits to be paid outside of the LTA, thus avoiding LTA charges. In addition, joining an EGLP scheme will not invalidate any previous LTA protection claimed by employees.
How does it work?
An EGLP scheme can either stand alone, or alongside a registered pension scheme. In some cases, there may be a benefit to stripping life cover from an existing registered pension scheme and starting to provide it from an EGLP scheme.
Where an employer only wants to provide cover for one key employee outside of a registered pension scheme (perhaps an exceptional earner, an individual with protection or someone with higher multiples), this can be achieved with a "relevant life policy". Relevant life policies are limited to a single member and, again, will usually be held on trust.
Are there tax charges for the employer?
EGLP schemes are treated differently from registered pension schemes. They do not benefit from the wholesale exemption from the inheritance tax regime for trusts, and additional care must be taken to ensure that premiums are deductible for corporation tax.
The tax position should be reviewed at the outset and then monitored on a regular basis. If properly run, an EGLP scheme should carry all the same tax benefits as a registered scheme without the LTA problems.
How can we help?
Our experts can:
- Advise on whether any proposed EGLP provides corporation tax deductibility, works from an inheritance tax perspective, creates any tax avoidance issues and/or has any unforeseen consequences from a LTA perspective.
- Advise on compliance obligations under the trusts register/register of beneficial ownership rules.
- Review and advise on any EGLP trust and policy prepared by an EGLP provider.
- Draft an EGLP or single member trust if necessary.