The Chancellor’s pensions revolution – whenever it finally happens – could turn the world of group risk on its head. The industry therefore needs to start planning for life without the lifetime allowance says Canada Life Group Insurance marketing director Paul Avis
Even if a pension Isa model is not introduced just yet, it would be wise not to rule out a radical move to Taxed, Exempt, Exempt from the current Exempt, Exempt, Taxed structure at some point in the future.
This debate in the world of pensions raises questions about how group life assurance could be simplified; and, if TEE does happen, how this would impact the group risk industry.
In a TEE world, there would be little point in retaining an LTA – which reduces from £1.25m to £1m in April – because it is possible that restrictions would be contribution based, rather than tax based, with phased, timed and taxed withdrawals for the funds too.
Currently, there are two types of lump sum – group life schemes and a death-in-service pension option – both of which sit outside the LTA. Registered scheme lump sum benefits are taxed if they take the individual over the LTA, while benefits in excepted schemes are not – hence their attraction to many employers. They should never be a default option due to the potential tax implications on entry and at the 10-year anniversary, and the additional trustee responsibilities that excepted schemes bring promote the need for specific, scheme taxation and legal advice.
So in a TEE world, or indeed an EET world if simplicity were the priority, what would a non-LTA environment look like?
First, as an industry we should be arguing to remove all group life schemes from any reference to pensions legislation as this is clearly a result of a legacy of alignment that does not feel relevant in an era of increasing pensions simplicity. However, to ensure that people retain and consider the group life benefit, there are clearly some current advantages that need to be rolled over into some form of new vehicle.
The current pensions trust approach works well, and so, as happens with individual protection, some form of trust to ensure that the benefit falls outside the estate would have to be agreed and regularised, possibly through legislation. The implication here is that the benefit would be paid to survivors. So while the benefits would be tax free, the premiums paid should not attract a P11d/benefit-in-kind charge, as they do currently. Protection is important and providing decent, possibly limited, levels of cover without an additional P11d charge has to be the aim.
No doubt, as with the LTA, the benefit would be limited – perhaps a new ‘free cover’ limit – and would possibly be called a ‘death-time allowance’ before inheritance tax became payable.
In effect, nothing should change as the aim should be for benefits to be payable under trust, free of IHT and outside the benefit-in-kind regime, possibly with some limitations. Due to the existence of a trust, as the employer would be paying the premiums they should continue to be allowable as a business expense.
Employees get frustrated that they cannot assign their group benefits to cover mortgage protection requirements. Therefore, whether group life benefits could be assigned – for example, through an amended nomination form where lenders could be beneficiaries – will also need to be discussed.
A potential reduction in individuals’ cover could be the outcome – where employers cancel the term insurance policy and use the group life policy to protect the mortgage on death. This would be unpopular with individual protection advisers and insurers but popular with employees, who could reduce personal costs while employed. Inevitably, this may raise the P11d/benefit-in-kind issue because, in effect, the employer would be paying for mortgage protection.
But employees still have financial obligations beyond their mortgage. For the need for additional life cover to be fully understood, industry-wide concerted education will be required.
But this is all conjecture. As the focus clearly seems to be on pensions changes, we are likely to continue to struggle as an industry to even get on the agenda, let alone convince the powers that be that simplicity would encourage greater protection. This would be weighed against the potential tax concessions we currently enjoy.