The group risk sector is in the midst of an existential crisis as pension legislation is reviewed says John Greenwood
The Chancellor’s long-term plan for an overhaul of the pensions system could have massive ramifications for the group risk sector, with workplace protection benefits potentially losing their tax privileges unless alternative models are approved by Government.
The Treasury may have put plans for a radical change to pensions tax relief on pause, but many predict that as soon as the Brexit vote is out of the way, George Osborne will be back to finish the job. Finishing that job could also finish group life in the way it currently exists, benefiting from no P11D charge on employees, premiums being able to be offset for corporation tax purposes and death benefits being paid tax-free. While corporation tax tax exemption is unlikely to be changed, P11D and IHT could be put in question.
With the massive pensions industry lobby incapable of guaranteeing the long-term future of tax relief on its product, can the group risk industry succeed in arguing that £1m life cover should remain tax free?
The tremors shaking the pensions industry risk taking the tax advantages of group life down with them. Some see the Lifetime Isa unveiled in this year’s Budget as a stepping stone to the complete abolition of the current pensions tax relief system.
The Lifetime Isa allows under 40s to contribute £4,000 a year and benefit from a £1,000 Government top-up that mirrors the 20 per cent tax relief currently enjoyed on auto-enrolment pensions. It is seen as a first step towards the radical solution Osborne was reportedly favouring ahead of the Budget, before a Brexit-fear fuelled blockade on all contentious policies postponed it until the summer at the earliest. That more radical solution, clearly spelt out as an option in the Treasury’s Strengthening the Incentive to Save consultation and which could arguably see the light of day in the Autumn Statement, could see the entire pensions tax relief system replaced with a pension Isa under the name Workplace Isa. This new system would allow perhaps £8,000 a year to be contributed, with a £2,000 Government match.
That equates to an annual allowance of £10,000 with 20 per cent tax relief, but means the lifetime allowance would disappear altogether, leaving registered life schemes with no tax advantages at all.
Swiss Re senior technical manager Ron Wheatcroft has been considering the radical nature of the Treasury’s proposals for some time. He says: “Registered group life schemes are Exempt, Exempt, Exempt, in that they get tax relief on the contributions and on the growth and the benefits are paid out through a discretionary trust tax free.” Any move away from this structure would be complex, he warns, and a full switch to pension Isa would bring a huge amount of change.
“When the Strengthening the Incentives to Save consultation was launched we looked at an assumption that there would be a flat rate of 30 per cent tax relief on pensions,” says Wheatcroft. “This would mean anyone on 40 per cent tax would essentially be getting a benefit in kind of 10 per cent on their life cover. The average premium per member is £100, but it is higher than that for a higher rate tax payer, around £300. That is a benefit in kind of £30. But if you have a tax charge, you have to give the member the opportunity to opt out. Then if you get significant opt outs you have to change the underwriting of the scheme. The pricing would have to change significantly,” he warns.
“With the more radical approach of the pension Isa, you would have everybody subject to a pension subject to a benefit in kind. So you would get 8 million people getting a P11D charge on their life cover. We don’t talk about the protection gap so much these days, but group life covers 40 per cent of the population. Do the Government really want to encourage people to opt out of that?” says Wheatcroft.
Excepted life cover policies already opt out of pension legislation completely. One adviser is understood to have lost a five-figure employee employer client because another adviser told them to put everyone into an excepted life scheme. But the excepted life route is not necessarily the silver bullet that will get the group risk industry out of jail if Osborne takes out pensions tax relief.
Excepted schemes have complex rules that mean 20 per cent tax liabilities may arise if an individual had a terminal illness in the first or 10th year of the trust.
Canada Life Group Insurance’s legal guidance says: “Trustees do not need to check the health of all members at outset or the tenth anniversary. However any death occurring in the first year or in the year after a tenth anniversary should be looked at with hindsight to ascertain whether a charge was due.
Some advisers and lawyers are recommending six-year or eight-year trusts to get around the 10-year anniversary problem, but with 490,000 people covered in excepted life schemes, according to this year’s Swiss Re Group Watch report, could another 8 million join them without attracting HMRC’s attention?
Canada Life Group Insurance marketing director Paul Avis says: “This is where we need Grid and the industry to engage with the Government to make sure that group risk does not get ignored again. We need to make our case to the Government for a separate system for group life that sits separate from pension legislation and that retains P11D, corporation tax and death benefit advantages.”