Difference Between Excepted and Registered Group Life Schemes

What Is A Registered Group Life Scheme?

Registered Group Life Insurance policies get their name from the fact they are registered with HMRC. Most Group Life policies are set up this way. It simply means that they fall under pension legislation, rather than life insurance legislation.

With a Registered scheme, if an employee dies, the claim is combined with other HMRC-registered schemes, such as pension schemes. These benefits count towards an individual’s Pension Lifetime Allowance.

What Is The Pension Lifetime Allowance?

The Pension Lifetime Allowance (pension LTA) is the maximum amount you can receive from pension arrangements before paying tax on them. In the year 2024/25, the pension LTA stands at £1,073,100.

For example, upon an employee’s death, their pension pot and Life Insurance claim will both form part of their pension LTA. Any funds above the tax-free allowance of £1,073,100 are subject to a tax known as the Lifetime Allowance Charge. This is charged at a rate of 55%.

Can Registered Schemes Affect An Employees Lifetime Allowance?

Entering into a Registered Group Life scheme could impact an employee’s Lifetime Allowance (LTA) protection. LTA protection provides them with a higher allowance before being subject to Lifetime Allowance tax charges.

People who have protected their Lifetime Allowance (LTA) by “locking in” the amount available in previous years are unable to join another registered scheme. If they do, they’ll lose their protection.

What Is An Excepted Group Life Assurance Scheme?

An Excepted Group Life scheme falls under life insurance legislation. This is a key difference from Registered policies, which fall under pension legislation.

As such, any benefits claimed from an Excepted Group Life Protection (EGLP) scheme will not be subject to the Pension Lifetime Allowance.

There are several reasons why an Excepted scheme might be a suitable choice:

• Higher earners, and / or those who’ve built up larger pensions are more likely to max out their Pension LTA. An Excepted scheme lets them use their allowance for their pension savings, rather than combining it with Group Life Insurance
• If certain employees already have Lifetime Allowance protection. As mentioned above, entering into a new Registered scheme will jeopardise that protection
• In cases where there are self-employed equity partners or LLP members who want to take out Group Life Insurance for themselves, but not their staff.

Legislation doesn’t permit equity partners and LLP members to set up a registered scheme only for themselves. They could join a registered scheme for their employees, however, there are 2 significant issues with doing so:

• The scheme rules will be available to all people included in it. This means employees can find out the benefit level for equity partners and LLP members
• Self-employed equity partners and LLP are often well paid and have larger pension investments. As such, they could exceed the Pension Lifetime Allowance on a Registered scheme.

So, Excepted Group Life Insurance schemes are often preferable for self-employed equity partners and LLP members.

How To Establish An Excepted Group Life Scheme

If you’re looking to establish an Excepted scheme yourself, there are certain stipulations:

• You must establish a discretionary trust deed. This will be treated as a relevant property trust, with the only asset being the group life insurance policy
• The policy must cover at least two lives
• It must provide a cash lump sum, payable on the death of a person included in the policy before age 75
• The method to reach the lump sum death benefits must be the same for all members the scheme covers
• The policy must have no surrender value. The only other payment you’ll receive from the policy is a return of premiums. This will take place where premiums have been paid in advance for an unexpired period of risk
• Provide evidence that the lump sum benefits are paid to an individual or charity beneficially entitled to them. The claim can also be paid to a trustee to ensure the beneficiary receives the payout
• Tax avoidance may not be the main purpose, or one of the main purposes, for establishing an Excepted scheme.

Why Use A Group Life Excepted Scheme?

The main benefit to using an Excepted scheme is that a payout won’t count towards an individual’s Pension Lifetime Allowance. Therefore, it won’t impact any Lifetime Allowance Protection an employee already has in place.

One drawback of using an Excepted trust is that it offers less flexibility. Many business owners want to provide greater cover for longer-serving or more senior employees. But with an Excepted trust, you cannot insure different categories of employees for different amounts of cover.

Instead, the group life policy will need to cover all lump sum death benefits on the same basis. For instance, all employees will receive the same multiple of their salary, or the same fixed sum.

Most Insurers offer Master Trusts for Registered and Excepted Group Life schemes. This saves you a lot of the admin, however, the documentation can still be complicated.

Our expert consultants at Drewberry can support with clear guidance on navigating the paperwork. We can ensure everything is set up correctly and smoothly on your behalf.

Nadeem Farid
Head Of Health & Wellbeing

Inheritance Tax And Excepted Group Life Schemes

As mentioned above, Excepted group life schemes require a discretionary trust when the policy is first set up. It’s also important to remember that Excepted group life policies fall under Life Insurance legislation.

For these reasons, Excepted schemes are subject to the usual Inheritance Tax that applies to all discretionary trusts. This could, in certain rare circumstances, give rise to:

• Entry Charges: A charge when something is placed into the trust
• Periodic Charges: A charge after each ten-year anniversary of the trust
• Exit Charges: A charge when an asset leaves the trust.

For Excepted Life Insurance schemes, the only asset permitted in the trust is the policy itself. It’s unlikely that HMRC will deem this to have any value if all members were of good health when the policy was placed into the trust.

Entry Charges

An entry charge could apply to the policy if an employee is terminally ill. This is often an actuarial value of 20% of any value HMRC deems the trust to have.

Periodic Charges

As we mentioned, the trust is unlikely to be deemed as having any value unless:

• A member dies close to a 10-year anniversary, and the death benefit are due, held by the trust, or not yet released to the beneficiaries
• A member is terminally ill at a 10-year anniversary, in which case an actuarial value of 6% may be charged.

If a periodic charge is ever made, it will be a percentage of the value of the asset. In these cases, it will generally be 6% of the value.

Exit Charges

If HMRC deems the trust to have value on its final 10-year periodic anniversary, an exit charge may apply. However, if the charge at the previous 10-year anniversary was nil, there will also be a nil-charge for anything leaving the trust before the next tenth anniversary.

During the first 10 years of the policy, the only value added to the trust would be a proportional return of premiums. This would apply when cover has been paid for in advance and an employee dies.

An exit charge wouldn’t apply here though, as the policy will have no surrender value.

Joseph Toft
Senior Employee Benefits Consultant

Are Payouts Subject To Individual Inheritance Tax?

As the trustees handle the death benefit, these are not treated as part of the deceased member’s estate. The Life Insurance payout is therefore not subject to an individual inheritance tax charge.

In general, trusts are not entirely free from inheritance tax. Inheritance tax is usually charged at 20% of the value of assets placed into the trust. HMRC rarely deems Excepted Group Life schemes as having any value, however, so these charges will generally not apply.

Registered Vs Excepted Group Life Schemes

To highlight the key differences between a Registered and Excepted Group Life Scheme, we’ve put together a comparison table below.

Get Expert Group Life Insurance Advice

We appreciate that Registered and Excepted Group Life schemes can be a complicated topic. Registered schemes are the most popular kind. This is because they have clear HMRC rules and are easy to set up compared to excepted schemes.

Excepted schemes are more complicated, and the HMRC rules surrounding them are less clear. But, they can be a great option for high earners, or employees with large pensions. Not only this, they might also be suitable for covering only groups of self-employed equity partners, or LLP members.

As such, there’s a lot to consider, from the level of death benefit you want to offer, to members’ Pension Lifetime Allowance.

Our expert consultants at Drewberry can advise on all these matters and more. If you’re considering Group Life Insurance, or other employee benefits, get in touch with us today.

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If you need help deciding whether an excepted or a registered Group Life Insurance scheme is right for you, then let us know.

Please don’t hesitate to pop us a call on 02074425880 or email help@drewberry.co.uk.