Difference Between Excepted and Registered Group Life Schemes

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18-02-2020

Most Group Life Insurance involves a scheme registered with HMRC. This means that any lump sum payout is aggregated and added to benefits from other HMRC-registered schemes, such as pension schemes.

As such, the benefit from registered Group Life Assurance schemes counts towards the pension Lifetime Allowance, currently standing at £1,073,100 in 2018/19. Any benefits you receive above this figure are therefore subject to a tax, known as the Lifetime Allowance Charge, of 55%.

Meanwhile, those who have protected their Lifetime Allowance (LTA) by locking in the higher amount available in previous years are prevented from joining another registered scheme or they’ll lose their protection.

The alternative to a registered Group Life scheme is an excepted Group Life policy, which are not tested against the LTA. However, excepted Group Life schemes are more complicated, especially with regards to the inheritance tax rules applicable to the discretionary trusts required during setup.

What is Group Life Insurance?

Group Life Insurance – also known as Death in Service Cover – is a way to provide life protection for a group of employees working for a single employer.

  • It pays out a cash lump sum into a specially-drafted trust on the death of an employee, which is then distributed to the employee’s family.
  • You can cover your employees for a multiple of salary – between two and four times salary is typical, although some providers permit multiples up to 15 times salary. Alternatively, you can cover employers for a fixed sum each.

Central to any good employee benefits package, Group Life Insurance is a highly-valued benefit among employees. It can help attract new staff and retain existing ones, all the while showing your duty of care as an employer.

Registered Group Life Scheme

A registered Group Life scheme is the most common way to set up Group Life Insurance. It falls under pension legislation rather than Life Insurance legislation.

Here, the scheme is registered with HMRC and therefore any benefits count towards your Lifetime Allowance, the figure you’re allowed to receive from registered schemes during your lifetime.

Registered schemes that provide only Group Life Assurance are relatively easy to set up and there are few HMRC reporting requirements.

Advantages of registered schemes include:

  • Tax relief is available on the premiums an employer pays for a registered scheme. The legislation is less clear for excepted Group Life schemes. Although in principal HMRC agrees tax relief is available for such schemes for the employer, for any employee-financed portion of premiums, e.g. via salary sacrifice, tax relief is not available for an excepted scheme whereas it would be for a registered scheme.
  • A registered scheme is permitted under tax legislation to pay dependants’ pension benefits (if it’s a joint Death in Service and company pension scheme). An excepted scheme cannot do this; only a lump sum can be insured under an excepted Group Life scheme.
  • With a registered scheme, you can have different multiples of salary for different levels of seniority within the business, or have some people, e.g. directors, on a fixed lump sum. This isn’t possible under an excepted Group Life scheme, and having a separate excepted scheme for each different benefit basis increases administration.
  • The legislation for registered schemes is well documented. HMRC provide registered scheme support for both employers and trustees. The legislation for EGLP isn’t so clear and employers may need to pay for legal advice to clarify particular points.
  • Exit charges and periodic charges may apply to an excepted Group Life Assurance thanks to the discretionary trust used during setup. However, these charges currently don’t apply to a registered scheme.

Entering into a registered Group Life scheme could impact on an employee’s Lifetime Allowance protection; this protection provides them with a higher Lifetime Allowance before being subject to the Lifetime Allowance Charge.

Excepted Group Life Assurance Scheme

An excepted Group Life scheme falls under Life Insurance legislation rather than pension legislation.

As such, the benefit does not form part of the Lifetime Allowance pension calculations and may therefore be particularly suitable for higher earners and / or those who’ve built up larger pension pots.

This is especially the case if they have any kind of protection for their Lifetime Allowance, as this will be jeopardised by entering into a registered Group Life scheme.

Another reason a company may choose to set up an excepted Group Life scheme is where there are self-employed equity partners and LLP members who want to set up a Group Life scheme for themselves but not their employees.

Current legislation does not permit this, although it does allow self-employed equity partners and LLP members to join a registered scheme set up to provide death-in-service benefits for their employees.

However, this often isn’t the preferred route because:

  • The scheme rules will be available to all people included in it, meaning employees could find out the benefit level for equity partners and LLP members
  • Self-employed equity partners and LLP members are often well paid and generally have large pension investments as well as needing high levels of life cover. This could potentially push them over their Lifetime Allowance with a registered scheme.

As such, self-employed equity partners and LLP members often opt to set up a life assurance as an excepted group scheme.

Establishing an Excepted Group Life Scheme

To establish an excepted Group Life scheme, you’ll need to do the following:

  • Establish a discretionary trust deed, which is treated as a relevant property trust. The only asset in that trust will be the excepted group life policy
  • Cover at least two lives
  • Ensure the policy provides for a cash lump sum payable on the death of a person included in the policy before age 75, with the same method (e.g. multiple of salary, fixed figure) being used across all staff members the scheme covers
  • Make sure the policy has no surrender value other than the return of a proportion of the premiums in respect of the unexpired period of risk that had been paid in advance
  • Provide evidence that the policy payout is paid to an individual or charity beneficially entitled to them; or a trustee or other person who will ensure that the beneficiary receives the payout
  • Make sure tax avoidance is not the main purpose or not one of the main purposes.

The main benefit to using an excepted Group Life scheme over a registered scheme is that the payout doesn’t count towards an individual’s pension Lifetime Allowance and won’t therefore impact any Lifetime Allowance protection an employee has in place.

Inheritance Tax and Excepted Life Schemes

With an excepted Group Life scheme, a specific type of trust known as a discretionary trust needs to be set up when the policy is initiated.

This means excepted schemes are subject to the usual inheritance tax rules that apply to discretionary trusts, which could, in certain rare circumstances, give rise to:

  • Entry charges – charged when something is placed in the trust
  • Periodic charges – at each 10 year anniversary of the trust
  • Exit charges – when anything of value leaves the trust.

These charges apply when anything of value is placed into a trust, has been in a trust for 10 years, or anything of value leaves the trust.

However, for an excepted Life Insurance scheme, the only asset permitted in the trust is the policy itself. This is unlikely to be deemed to have any value by HMRC if all members are of good health on the date the policy was ‘settled’ into the trust.

Where a member is terminally ill, though, an actuarial value may be calculated to determine the entry charge, which will typically be 20% of any value HMRC deems the trust to have.

A periodic charge is a percentage of the value of the asset(s) in the fund on each tenth anniversary of the creation of the trust. Again, where the only asset in an excepted Group Life Insurance trust is the policy, the the trust is unlikely to be deemed to have a value unless:

  • A member dies close to a tenth anniversary and the death benefits were due or held by the trust and had not been paid to the beneficiaries; or
  • A member is terminally ill at the tenth anniversary, in which case an actuarial value may be calculated.

The periodic charge will typically be 6% of any value.

An exit charge may be due if HMRC deemed the trust to have value on its last 10 year anniversary; if, however, the charge at the previous 10-year anniversary is nil, an exit charge for anything of value leaving the trust between 10-year anniversaries will also be nil.

In the first 10 years, the value added to the trust would be a proportionate share of the premiums paid for the deceased individual. However, there would not normally be any exit charge in the first 10 years as the policy is unlikely to have any value given that a Group Life Insurance policy has no surrender value.

As the trustees have discretion over the payment of the death benefits, these are not treated as within the scheme member’s estate.

Get Expert Group Life Insurance Advice

An excepted Group Life Assurance scheme is the more complicated option and the rules surrounding such schemes are less clear with HMRC.

However, if you have employees / directors with large pensions, any fixed protection for their Lifetime Allowance, or only want to cover a group of self-employed equity partners or LLP members, it could be a better option.

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Nadeem Farid Head of Employee Benefits at Drewberry

If you need help deciding whether an excepted Group Life or a registered Group Life 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.

Nadeem Farid
Head of Employee Benefits at Drewberry

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Jonathan Chadwick
08/06/2020
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