Employers need to review excepted group life assurance arrangements before the abolition of the lifetime allowance (LTA) on 6 April this year, according to a leading consultancy firm.
Quantum Advisory has warned that many employers do not have a full understanding of the potential tax situtation going forward, which could potentially leave employees with unexpected charges.
Quantum principal consultant Graham Yearsley says: “Many employers have implemented excepted group life ssurance arrangements for their employees. These group life schemes are trust based and provide for a lump sum to be payable in the event of death in service.
“As they are not registered pension schemes, they have become very popular with high earning employees as they are not tested against the current LTA.
“Whilst lump sum death-in-service benefits will no longer be tested against the LTA, members of a registered pension scheme from 6 April 2024 will be tested against the new lump sun and death benefits allowance (LSDBA). As the LSDBA will be subject to the deduction of relevant benefit crystallisation events, of which an authorised lump sum death benefit is one such event, any excess death in service lump sum above the new LSDBA will be taxed at the recipient’s marginal tax rate which could reach 45 per cent.
“This will make a big difference to both employer and employee.”
Yearsley added: “There is clearly still a need for excepted group life assurance and it’s very concerning that employers may not understand the potential tax charges associated before making a decision on who should continue to be insured in that arrangement.
“This could lead to significant issues going forward. Employers must evaluate all potential tax charges soon and decide if they are still fit for purpose as an option for their employees.”
