Following our recent note about life assurance for high earners taking fixed protection after 6 April 2012, HMRC have issued a formal statement in response to representations made by the pensions industry.
However, depending on a particular scheme's rules and the insurance policy backing the benefit, fixed protection could potentially still be lost following payment of an insurance premium.
What HMRC are now saying
HMRC's revised position is as follows:
- Where the only death benefit payable for fixed protection members after 6 April 2012 under a registered scheme's rules is an amount equivalent to what is paid under an insurance policy, this is a money purchase (defined contribution) arrangement and so any contribution or premium paid after 6 April 2012 will therefore result in fixed protection being lost.
- Where the death benefit payable for fixed protection members after 6 April 2012 is expressed to be the greater of a defined benefit (eg 2 times pensionable salary at the date of death) or the amount payable under an insurance policy, HMRC's view is that this is a hybrid arrangement and so the payment of a premium will result in fixed protection being lost.
However, the following situations will not be counted as money purchase or hybrid arrangements, there will not be any benefit accrual and premiums paid after 6 April 2012 will not cause fixed protection to be lost:
1. Where the only benefit payable for fixed protection members is a defined benefit (eg 2 times pensionable salary at the date of death); or
2. If the amount payable under an insurance policy in excess of the defined benefit is retained by the scheme; or
3. Where a defined benefit is payable and the scheme makes up the shortfall in the amount paid by an insurance policy; or
4. Where a defined benefit is payable, is backed by an insurance policy and the policy contains restrictions which may mean, if they apply, that a lesser amount will be paid to the scheme or beneficiaries than the full defined benefit. HMRC have in mind here catastrophe event restrictions and restrictions on particular individuals who represent a greater risk which are common in life assurance policies.
However, HMRC then go on to say that the restricted amount, after the restriction is applied, should still "itself be expressed as a defined benefit lump sum death benefit" (i.e. an amount determined by reference to salary, service of the member or some other factor). They give examples of this:
- the benefit represents a percentage of the [defined benefit] that would have been provided in normal circumstances
- it is paid on a pro rata basis
- it is expressed as a lower amount
- the maximum paid under the policy is capped
5. Where a refund of contributions is payable on the member's death. (Where the rules also provide for the refund to include interest, this must be expressed or can be expressed in percentage terms).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
