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The Pension Trap

14 Oct 2015

2 minute read

Death-in-Service is Group Life Cover which as an employer you provide for your staff as part of their benefits package - a good benefit and one which the older, higher paid, longer serving staff are likely to value quite highly.

They have generally been:

  • set up as registered schemes
  • simple to set up with plenty of support available from HMRC
  • payable without Inheritance Tax (IHT) or other charge
  • flexible in the levels and types of death benefit provided

When the concept of a Lifetime Allowance was introduced in 2006, those with large existing pension funds were given the option of Enhanced or Primary protection. The issue of death benefits from a registered Death-in-Service scheme raised its head but those affected by it were few and far between. However, with the recent reductions in the Lifetime Allowance, this issue is becoming relevant to more people.

So what’s the issue?

On death, pension benefits are tested against the Lifetime Allowance. If the benefits exceed the Lifetime Allowance then a 55% tax charge is payable on the excess (assuming this is paid out as a lump sum).

For example, if an employee’s salary was £120,000, and your Death-in-Service scheme is set at 5 times salary, this would mean the employee already has £600,000 taken out of their Lifetime Allowance. With the drop to £1,000,000 from 6th April 2016, this leaves less for the actual pension funds that they have built up for their retirement.

You may not know of this issue because your employees are unlikely to have spoken to you about their personal pensions. In some ways it isn’t an issue for you, but the reason why you have the life cover for your employees is because you want to do the right thing.

There is an answer for a group of people or just one person: Excepted Group Life or Relevant Life policies. These enable employers to offer tax-free benefits for their highest earners that do not count towards their Lifetime Allowance.

The premiums to setup the policies should be deductible as a normal business expense so long as they meet the usual “wholly and exclusively” criteria. They also shouldn’t create a P11D benefit for the employee. If written under a discretionary trust, the benefit will be subject to normal IHT rules, but should not be subject to income tax and will not count towards the Lifetime Allowance.

For key employees the option to avoid a nasty shock for their beneficiaries and a windfall tax payment to HMRC makes the Excepted Group or Relevant Life policy worth some serious consideration.

If you would like more advice on Death-in-Service or setting up the above policies, please contact Ed Gibson on 01865 292197 or email ed.gibson@shawgibbs.com.

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