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 £1,055,000 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.
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.
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.
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:
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.
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:
As such, self-employed equity partners and LLP members often opt to set up a life assurance as an excepted group scheme.
To establish an excepted Group Life scheme, you’ll need to do the following:
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.
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:
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:
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.
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.
We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.
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 email@example.com.
Head of Employee Benefits at Drewberry
I had the pleasure of dealing with Jake Mills in organising my insurance. Jake was fantastic to deal with — his patience and understanding really helped.