Life assurance schemes – update on excepted schemes

Many employers are starting to establish excepted life assurance arrangements which fall outside of the UK tax regime for pensions saving. Benefits under excepted schemes do not count towards the “lifetime allowance” for tax efficient pensions saving (currently £1 million).

The reduction in the Lifetime Allowance and the number of people with special tax protections (protecting the value of pension benefits earned to this limit) has driven the rise in the establishment of excepted schemes.

Some employers are switching all their employees into excepted schemes rather than the traditional registered schemes.

The underlying benefits provided under an excepted scheme are the same as those provided in a registered arrangement – namely a multiple salary lump sum death benefit. Also, the same requirements apply in relation to the need to establish a trust deed, to set out provisions for the discretionary trust to provide for the payment of monies to intended beneficiaries.

When establishing excepted schemes employers should take legal, financial and tax advice and the following factors are important:-

• Decisions should be made on who will be the eligible employees for the purpose of the excepted scheme and the benefits provided under the policy. Will this be a limited class of employees with tax protections in place or a wider class or all employees? The trust should not be established with an aim to avoid tax, and advice will be required especially where the employer “cherry picks” certain employees as being eligible;
• There are situations where tax can be payable during the life of the trust. This tax charge can impact on member benefits where the trust allows benefits to be offset against tax liabilities. These situations include where a terminally ill member joins the scheme and dies. Also at the 10 year anniversary of the trust where there are undistributed funds in the trust;
• The tax regulations which indicate that underlying benefits are not chargeable to income tax as “benefit in kind” refer to a tighter class of beneficiary for the payment of benefits under these excepted schemes than are otherwise typically provided for under a discretionary trust deed. Also, the regulations do not refer to the ability of monies being payable to the member’s estate.  Advice is required on the approach. The Revenue does not provide any helpful guidance;
• Employers should make sure that members of excepted schemes receive new “expression of wish” forms – which indicate intended beneficiaries. This information is useful to the trustee (typically also the employer) in the event of a death in service and a payment out under the scheme;
• Finally, communication exercises with employees are important to explain the changes and all the requirements associated with excepted schemes.

We frequently draft life assurance arrangements and assist with communications. Please contact Rupert Graham-Evans on 02380857240 or email [email protected] for further guidance. We can also provide details of risk brokers in relation to life assurance policies.