Lifetime Allowance: more than just a pension issue

The Lifetime Allowance limits how much tax-free pension benefit someone can draw from their pension schemes. Employers need to take care that they structure life assurance benefits in a way that does not inadvertently affect employees.

Life assurance benefits provided through a Registered Trust are seen as pension benefits, so they must be considered in aggregate with an individual’s pension savings. 

The allowance has reduced dramatically in recent years, from £1.8m in 2011 to its current level of £1.03m. The limit is now index-linked and will increase to £1.055m for the 2019/20 tax year. 

When the government introduced the Lifetime Allowance, they offered individuals the option to protect pension benefits already above this level, or expected to rise above this level. 

However, if an individual joins a new Registered Life Assurance arrangement (even if only to receive life assurance benefits) this protection can be lost, after which it cannot be put back in place. 

It is possible to provide Group Life Assurance benefits on a non-registered basis, typically structured through an Excepted Group Life Policy (EGLP) and set up under a Trust.

This does not fall under pension legislation and as a result is not affected by the Lifetime Allowance.Our Benefits specialists can help you review your current benefits programme and offer advice on the most effective structures to accommodate employees whose benefits are at risk.

How does the Lifetime Allowance affect my employees?

According to Swiss Re Group Watch 2018, over 85% of UK group life assurance cover is still provided through registered arrangements, which makes them subject to the Lifetime Allowance.

Where pensions benefits are also held in a Registered Pension Scheme, both the pension benefits and lump sum death benefits are aggregated before being tested against the Lifetime Allowance in the event of a person’s death.

The fact that an individual’s benefits are combined, triggering a charge, may not be immediately obvious to employers and/or Trustees who could be affected. However, employers have access to helpful indicators, such as knowing the level of death in service benefit employees are entitled to; if this is approaching the £500k mark, it is likely that they will be affected by the Lifetime Allowance.

The deceased’s estate is likely to feel the impact, as the beneficiary must pay a tax rate of 55% on all benefits over the Lifetime Allowance, reducing the benefits paid out to their family.

Excepted Group Life Policies: an alternative solution

A number of insurers now operate EGLP master trusts, which makes it very easy to set up an alternative arrangement. 

Swiss Re Group Watch 2018 shows that the number of people insured under an excepted scheme grew by 21% in 2017, yet in our experience there are still a number of  employers who are unaware of this issue.

EGLPs are not completely without complication and in some instances they can still be subject to inheritance tax in the form of Exit and Periodic charges, which fall to the Trustees of the associated trust. 

Employers need to be aware of the different rules (and taxation) that apply.

HMRC rules applying to EGLPs

  • The policy cannot insure employees over 75

  • The policy must not provide a surrender value

  • The benefit can only pay out a lump sum 

  • Benefits payable under the policy must be paid to either an individual entitled to them (or a charity), or a Trustee for payment to individuals

  • Lump sum payments are not payable to another member of the EGLP (payments are possible where the beneficiary would be considered to be a dependant of the deceased)

  • The same method must be used for calculating the benefits payable for each member

  • The policy is not taken out with the main

Taxation of EGLPs

Periodic charges: possible charge of 6% on the value within the trust at the 10th anniversary and every 10th year thereafter.

Exit charge: when the member dies a possible charge of 6% on the value added to the trust.

Due to the nature of such arrangements it is unlikely that there will be a value attributed to the trust, which means Period and Exit charges are also unlikely. However, there are possible scenarios where these charges might be incurred and the appropriate tax advice should be sought.

The Trustees are responsible for reporting benefit payments and any potential tax charge to HMRC.

How can Lockton help? It is easier than ever to switch to an EGLP and, unless the benefit level is changing, switching to an excepted structure is unlikely to have any impact on your premium – so there is no need to wait until the rate review or annual renewal date.

Using your employee data, we can track who might be affected, and suggest the best structure for setting up an EGLP or revising an existing registered arrangement.

For further information, speak to your Lockton consultant or contact:

Dymphna Hopkins, Employee Benefits Consultant

T +44 (0)20 3933 2063 | (opens a new window)