In this article we look at what impact recent pension taxation changes might have on how employers provide this valuable benefit.
Many employers operate death in service ('DiS') schemes, paying out a multiple of salary in respect of employees who die while in service. This doesn't necessarily mean they have to be at work when they die, but rather that they are current employees.
It's a delicate and difficult time for all parties, including for the representatives of the employer who often have to decide who receives the benefit. We've written about this before, so in this article we want to look at what impact recent pension taxation changes might have on how employers provide this valuable benefit.
It's a good time to look at whether you're using the most appropriate vehicle for DiS. Each has some advantages and disadvantages.
But if you have to make the decision as to who gets what benefit, we can help. Please get in touch if you want to talk about this. Remember, it's never correct to pay the benefit automatically in accordance with the expression of wishes form, even if you may well eventually decide to do so.
Ways to offer death benefits
In the past, death in service benefits were often part of the employer's pension scheme. You had to be a member of the pension scheme to have death benefits paid in the event of your death. This is still common in the public sector and in longer-established areas of business and industry. It's useful for employers as the scheme trustees are responsible for paying out the benefits – the employer just pays for it.
More recently, however, DiS benefits have increasingly been dealt with separately. You can still set up a registered pension scheme that provides nothing but death benefits, usually called a Registered Group Life Scheme (RGLS). That is very common – pension scheme structures, regulation and taxation are familiar to most employers, trustees and advisers.
A few employers self-insure, promising a DiS benefit, but paying out benefits themselves directly as they arise. This means they don't have to pay a regular insurance premium, but if they sadly experience a large number of deaths in a short period of time, it can be very expensive.
Or you can set up a separate 'excepted group life scheme' or EGLS. These are not classed as pension schemes, and are regulated as insurance products.
The tax treatment of a registered pension scheme, whether or not it provides only death benefits, is different from an EGLS. That used to be the big advantage for EGLS.
An RGLS, set up just to provide DiS benefits, is still a registered pension scheme, so benefits were subject to the Lifetime Allowance. This capped what could be saved tax-efficiently in all pensions relating to an individual. It meant that DiS benefits from a pension scheme in excess of the lifetime allowance were subject to a Lifetime Allowance Charge, calculated at the late member's marginal rate.
Putting DiS benefits into a EGLS meant they weren't affected by the Lifetime Allowance. It allowed employers to provide a valuable benefit to senior staff without that tax implication.
So what's changed? and what happens next?
The 2023 Spring Budget changed this. The Chancellor announced that from April 2023 there would be no more Lifetime Allowance Charges. And the Lifetime Allowance itself would be abolished from April 2024. That means that higher earners can start saving into pensions again without tax penalties, and RGLS benefits, or those from a conventional registered pension scheme, are no longer subject to Lifetime Allowance Charges.
At a stroke, the main calling card for EGLS was gone. And in other ways, for example in benefit structure and how DiS benefits are actually paid, they're more limited than RGLS arrangements.
So, are EGLSs no longer of any use?
Firstly, it's unlikely that existing ones will be replaced with pension scheme-based DiS schemes. There is no reason to replace a benefit offering that works fine as it is. They may be wound up if they were set up solely to replace an existing RGLS for tax reasons, but otherwise they will keep running.
But will new EGLS still be set up? Potentially, yes.
There are still some advantages in the structures EGLS provide. Generally, if the employer is a partnership or Limited Liability Partnership, you can't use a pension scheme or RGLS to provide increased DiS benefits to equity partners compared to the rest of the workforce. The same offer has to be made to all. You can however use an EGLS as an alternative, which can be as restricted in availability as the employer likes. And you can use it as an alternative scheme if you want to provide higher benefits to some employees than others.
And, finally...as soon as the Chancellor announced that the Lifetime Allowance would go, the Labour Party announced that if they formed a government after the next General Election, then they would reinstate the Lifetime Allowance. We've not seen any form of manifesto including this of course, and we don't know how else pensions and DiS benefit tax treatments might change. But the next General Election must take place by the end of January 2025, so it's probably too soon to consign EGLS to the scrapheap. They may yet be useful again...
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.