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Excepted group life schemes - what you need to know

Doug Rice
Doug leads the employee benefits consultancy team at Jelf, specifically focusing on meeting the rising demand for effective UK and international employee benefits management programmes. In addition, he heads up the international Mercer Marsh Benefits team and is Chair of the Jelf & MMB joint venture. Doug has over 20 years’ experience in the employee benefits sector, having previously worked for Medic4all, Cigna and Bupa.
One aspect of your group life insurance policy which you may wish to consider is the implementation of an excepted group life insurance scheme to run alongside your current
registered policy. As you may be aware, a registered group life insurance scheme counts towards an individual’s lifetime allowance total, whereas an excepted scheme does not.

Lifetime allowance

The lifetime allowance was created when pension simplification legislation was implemented in April 2006. Benefits that count towards the lifetime allowance include registered pension and lump sum death benefits from registered group life insurance schemes.

The lifetime allowance was reduced from £1.8m to £1.5m with effect from 6th April 2012, and to £1.25m with effect from 6th April 2014. On 6th April 2016 this was further reduced to £1m but from 6 April 2018 the lifetime allowance will increase annually in line with the Consumer Prices Index (CPI). For 2018/19 this means the current lifetime allowance is £1.03 million.

Benefits that exceed the lifetime allowance are subject to a tax charge of 55% when taken as a lump sum, or 25% if taken as income (in addition to any income tax). The tax charge is payable when the benefits are paid either to the member (in terms of pensions) or to their beneficiaries (in the case of death benefits). Excepted group life insurance schemes provide lump sum death benefits outside of the registered pension scheme environment. Therefore any benefits paid are not currently included in the calculation of the lifetime allowance.

HMRC has set a number of conditions that need to be met for a policy to qualify as an excepted group life insurance scheme. Read more about the conditions here

Why do you need an excepted group life scheme?

One reason why an employer should have an excepted scheme set up is for employees who have applied for enhanced protection or fixed protection.

The Government introduced enhanced protection and fixed protection when they reduced the tax allowances. Employees were allowed to apply for enhanced protection or fixed protection to protect their existing registered scheme pension rights from tax charges.

Employees must adhere to additional restrictions on their registered group life scheme membership. If they don’t keep to these restrictions, they will lose their enhanced protection or fixed protection and may have to pay more tax when they receive a registered scheme benefit.

Be mindful that schemes are subject to the normal inheritance tax rules that apply to discretionary trusts, which could give rise to certain charges.

The cost of excepted group life schemes

Normally there will be no difference in cost should you wish to set up an excepted scheme for a defined section of your membership, but check this with your current insurer.

You will be required to execute an excepted trust deed to implement this and it will also result in two separate policies being in place. However, they will most likely have the same unit rate and free cover level.

Note that a new excepted scheme cannot be incepted until an excepted trust deed has been completed. Remember to seek tax advice before implementing any change.

This information is provided for the purposes of general interest and is not intended to apply to specific circumstances. Reasonable steps have been taken to check accuracy at the time of writing but we make no representation as to future accuracy. This information does not constitute legal or regulatory advice. We are not qualified to provide, and will not provide, legal or regulatory advice. We recommend that you obtain your own such specific legal or regulatory advice on matters from relevant professional advisers.

FP18.462

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