Employers should re-evaluate excepted group life assurance arrangements in the lead up to the abolition of the lifetime allowance on April 6, Quantum Advisory has urged.
The financial services consultancy warned many employers do not have a full understanding of the potential tax charges going forward.
Quantum principal consultant, Graham Yearsley, explained many employers have implemented excepted group life assurance arrangements for their employees.
He said these group life schemes are trust based and provide for a lump sum to be payable in the event of death in service.
“As they are not registered pension schemes, they have become very popular with high earning employees as they are not tested against the current LTA,” he stated.
However, Yearsley warned that, while lump sum death in service benefits will no longer be tested against the LTA, members of a registered pension scheme from April 6 2024 will be tested against the new lump sum and death benefits allowance.
As the LSDBA will be subject to the deduction of relevant benefit crystallisation events, of which an authorised lump sum death benefit is one such event, any excess death in service lump sum above the new LSDBA will be taxed at the recipient’s marginal tax rate.
This could reach 45 per cent and will “make a big difference” to both the employer and the employee.
“There is clearly still a need for excepted group life assurance and it’s very concerning that employers may not understand the potential tax charges associated before making a decision on who should continue to be insured in that arrangement,” Yearsley added.
“This could lead to significant issues going forward. Employers must evaluate all potential tax charges soon and decide if they are still fit for purpose as an option for their employees.”
In the Autumn Statement the government confirmed it would scrap the LTA from early April, after it removed the lifetime allowance tax charge for benefits taken during the 2023/24 tax year back in Budget 2023.
However, almost immediately after the abolition announcement, shadow chancellor Rachel Reeves said the Labour Party would reverse the change.
Before April 2023 the lifetime allowance restricted the tax efficient benefits which an individual could take from a pension scheme.
This was set at £1,073,100 although some individuals had a higher ‘protected’ lifetime allowance.
tom.dunstan@ft.com
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