As employers will be aware, the lifetime allowance (LTA) will be abolished from 6 April 2024. The LTA is the maximum amount of tax-relieved savings that an individual can build up in registered pension schemes over their lifetime. The abolition of the LTA raises a number of areas for consideration by employers, one of which is lump sum death in service benefits.

Currently, lump sum death in service benefits paid in respect of members of registered pension schemes are typically tax-free. The main exception is where the benefit exceeds the member's available LTA. In that case, the excess is subject to the LTA charge (55% until 5 April 2023 and the recipient's marginal tax rate since then).

In light of this, many employers have put in place arrangements for high-earning employees known as "excepted group life assurance arrangements". These arrangements are trust-based and provide for a lump sum to be payable in the event of the member's death in service. The benefits are backed by a life insurance policy held by the trustees. Benefits paid from these arrangements typically do not form part of the member's estate for inheritance tax purposes and they are not subject to income tax. In addition, excepted group life assurance arrangements are not registered pension schemes and benefits paid from them are not therefore tested against the LTA.

Do employers still need excepted group life assurance arrangements?

With the abolition of the LTA, employers who have put in place excepted group life assurance arrangements may be considering whether such arrangements should be retained. Although lump sum death in service benefits paid in respect of members of registered pension schemes will no longer be tested against the LTA, they will typically be tested against a new allowance that is being introduced from 6 April 2024 – the member's lump sum and death benefit allowance (LSDBA). This will be £1,073,100 (i.e. equivalent to the current LTA), unless the member has some form of LTA protection which will give them a higher LSDBA. If the death benefit exceeds the member's available LSDBA, the excess will be taxed at the recipient's marginal tax rate.

While the tax charge that will apply where death in service benefits exceed the LSDBA is lower than that the previous LTA charge of 55%, it could still be significant – potentially up to 45%, depending on the recipient's personal tax position. The rationale for employers having excepted group life assurance arrangements in place therefore continues to be relevant.

Originally published by 14 February, 2024

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