Employers: is it time to take a look at your life assurance arrangements?

With the unwelcome news that inflation is rising and likely to continue to rise in the coming months, increasing numbers of employees are likely to be caught by the erosion of the real value of the pension lifetime allowance (“LTA”).

With the LTA frozen at its current level of £1,073,100 until at least 2026, both higher paid employees and those who have been paying into a pension for a good number of years may be in danger of exceeding the LTA. Where the LTA is exceeded, a lifetime allowance charge of up to 55% on the excess is payable.

A point which is often overlooked by employers is that payments on the death of an employee from life assurance arrangements set up as registered group life assurance schemes count towards that employee’s LTA. When added to an employee’s pension savings, a life assurance death benefit of a multiple of four or five times salary can easily result in the LTA being exceeded. However, employers can assist by providing life assurance benefits through excepted group life arrangements. Importantly, unlike those paid from registered group life assurance arrangements, lump sum death benefits payable from excepted group life arrangements do not count towards an individual’s LTA.

Historically, employers often set up excepted group life assurance arrangements only for their higher earning employees who were, or were likely to be, subject to the LTA. The erosion of the real value of the LTA, coupled with a desire to streamline the number of life assurance arrangements which must be administered, is now leading employers to consider replacing existing registered group life arrangements with cover under an excepted group life arrangement for all employees. This is a trend which is likely to continue for the foreseeable future, but great care must be taken when setting up excepted group life arrangements to make sure there are no adverse tax consequences.

If you’d like to discuss how we can help with setting up an excepted group life assurance scheme please get in touch with your usual contact in the Burness Paull pensions team.

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