We recently highlighted an issue relating to the potential loss of fixed protection under life cover arrangements. A sudden change of heart by HMRC means that the concerns this had raised for members, trustees and scheme employers have largely been allayed.

A reminder

Our  Law-Now last week flagged HMRC's treatment of arrangements to pay lump sums on death, capped by reference to insurance policy proceeds, as "hybrid arrangements". The impact of that interpretation, under the fixed protection legislation, was that if an individual who had elected for fixed protection was a member of such an arrangement, he would lose that protection at the time the next insurance premium under the policy was paid on or after 6 April 2012.

HMRC's revised reasoning

HMRC has now issued a statement which clarifies its analysis. In particular, the statement acknowledges that even where there are insurance restrictions in place which could reduce the total amount paid, this will not threaten fixed protection where the benefit after it has been so reduced can itself be expressed as a defined benefits lump sum death benefit, for example where:

  • it represents a percentage of the lump sum that would otherwise have been provided;
  • it is paid on a pro rata basis;
  • it is expressed as a lower amount;
  • the maximum amount paid under the policy is capped.

In our view, this wide statement applies to the vast majority of cases where a death benefit is limited or reduced by reference to the underlying insurance policy. The welcome result is that in those cases HMRC are comfortable that the legislation does not mean that fixed protection would be lost.

Members who have already ceased life cover

Helpfully, HMRC has also acknowledged the position of members who had already ceased life cover, due to the risk that continued payment of premiums on or after 6 April would lead to fixed protection being lost. HMRC will not regard the re-instatement of such cover as being a "new arrangement" (which, under the legislation, would itself lead to loss of fixed protection) so long as the cover is re-instated as soon as possible, and on a non-increased basis.

Conclusion

A week can be a long time in pensions, and HMRC's change of heart will come as a relief to the many schemes whose rules restrict the level of life cover payable to an amount payable by the insurer. However, should you have any queries, please speak with your usual contact at CMS Cameron McKenna.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 30/03/2012.