Group life insurance has a specific challenge with the use of two trust vehicles to provide death benefits which purport to do the same thing. Group life insurance is a workplace benefit, paid for by employers but with benefit payments ultimately going to the family or loved ones of employees who die. Simplifying the trust regime for providing these benefits would lead to a fairer, more transparent approach and avoid the unintended consequences of unfair beneficiary outcomes.
Lump sum death benefit schemes can be written under a discretionary trust which is classified as either registered or excepted. These trusts have no value until the benefits become payable. Both are written and pay out a lump sum to the survivors of a deceased employee on death.
The benefits from a registered pension scheme contribute towards an individual’s Pension Lifetime Allowance (LTA). These could be subject to a tax charge of 55 per cent if the total benefits are over the prevailing LTA (£1.055m tax year 2019/20) and the individual has not opted for one of the many forms of protection.
However, the death benefits from an excepted scheme do not contribute to an individual’s LTA. Excepted trusts are subject to the relevant property regime so periodic entry and exit charges may reduce the benefits trustees pay to the deceased’s financial dependants. Trustees may then face a choice as to how they meet those charges and their responsibilities under the rules of the trust.
This tax treatment is unfair and opaque. Many beneficiaries will only learn the tax position after they have been bereaved, and they normally have no input into which trust vehicle the employer chooses to use. The Inheritance Tax (IHT) regime is already complex, and an additional LTA charge for registered schemes or reduced death benefit for excepted schemes is a further burden on vulnerable, recently bereaved beneficiaries.
Could the market grow by new customers buying the benefit if we embrace simplicity? How could we go about it? Here are some ideas which we hope will start a conversation about what could be achieved with a bit of courage and imagination.
Firstly, simplify the excepted trust requirements. Simplification would increase the fairness and transparency of the regime. This might
Canada Life Group Insurance marketing director
include the removal of entry, periodic and exit charges, the need for single benefit levels which lead to multiple policies being set up and a review of the additional criteria for excepted scheme implementation and management impacts. This would increase certainty for almost a million employees that their loved ones will not face unexpected taxes on their death and will have the peace of mind that the benefit will enable them to be financially supported in difficult times.
Secondly, exempt ‘pure protection’ policies from the relevant property trust tax regime for two years after a claim has been paid. This would simplify administration without having a substantial effect on the amount of IHT payable, but could require a lot of legislative and administrative labour up-front to bring every existing policy into this new regime.
Thirdly, amend Part 4 of the Finance Act 2004 such that lump sum death benefits from registered group life schemes do not contribute to LTA calculations. Such a change would limit the need for excepted schemes, unifying roughly 9.5 million people in one regime. Once again, it would involve legislative and administrative legwork as any policy operating on these terms would need to be rewritten. There is also some doubt that Government would support losing this tax stream, but it is for us to make the case that it is worthwhile.
Finally, remove registered group life scheme from pension legislation but retain the current tax position. Severing the legislative link would cut unnecessary reporting and administration for employers. It would also deliver clarity for trustees and ensure the survivors of the deceased insured person will not be subjected to the LTA for this benefit. Additionally, it would ensure pension protections that employees have opted for are not jeopardised by joining a registered group life scheme, even if only due to accident or oversight. Without foresight and careful planning, there is a risk that any alternative created this way would be just as complicated in different ways. Disentangling existing group life policies created as part of a pension scheme would also need care and advice.
We need a single trust vehicle that is easy to administer, so trustees, employers and employees’ survivors know the benefits they can expect at the time when they need them most.