Registered group life schemes have traditionally been perceived as the simplest way for employers to provide group life lump sum benefits for their employees following Pension Simplification in 2006.
A Registered group life scheme has a beneficial tax regime for all concerned. The scheme administrator needs to formally register it with HMRC using an online system, the Managing Pension Schemes Service. The employer may treat the premiums as a business expense and therefore offset them against Corporation Tax.[1] Benefits paid out following an employee’s death are normally provided using a discretionary trust. This means these benefits do not form part of a member’s estate and will not be included in any calculation of Inheritance Tax (IHT). It also enables the benefits to be paid swiftly to the individual’s family or beneficiaries.
In 2018, 8.6 million people were covered under 44,470 group life policies.[2] For the vast majority of these, membership of a Registered Group Life scheme will provide a simple and basic level of certainty that their loved ones will be provided for if the worst happens. However, for a small proportion of higher earners things may not be so straightforward.
The Lifetime Allowance (LTA) is a limit on the amount of pension that can be drawn from pension schemes, whether lump sums or retirement income, and can be paid without triggering an extra tax charge. As Registered group life schemes are governed by pension legislation, any lump sum benefits are added to your anticipated retirement pension funds to provide a cumulative ‘pension’ amount. This is then assessed against the LTA, which is currently £1,055,000. This limit is also applied to lump sums payable on death, but not to death in service pensions.
For lump sum death benefits which exceed the LTA, a 55% charge is applied to the excess. It is the responsibility of the scheme administrator to report any lump sum which exceeds 50% of the LTA to HMRC as part of their event report.[3] They also need to report any lump sum payment to the deceased’s Legal Personal Representatives (LPRs). If the employee also had other pension arrangements in place, any payment made under another arrangement would also count towards the LTA and the scheme administrators of that arrangement should also report this.
The responsibility for the payment of any LTA charge falls upon the recipient of the lump sum payment. LPRs must not only work out whether there is a liability but, if there is, must advise HMRC within certain time limits.[4] This is further complicated by the fact that there is no specific form for reporting Registered group life payments to HMRC. Not only is there no specific form, the reporting is couched in technical language which it is entirely conceivable will be overlooked. Whether the reporting is right or wrong, a very unwelcome surprise could be in store for beneficiaries if they have already been made aware of how much they could expect to receive.
In order to maximise protection of their accumulated pension, high earning individuals may have opted for one of the many forms of pension protection, such as Fixed Protection or Enhanced Protection. There is a risk that this could be jeopardised or even lost completely if they either remain in, or join, a Registered group life scheme. It is possible that employers may not be aware of any protection being in place and employees may not appreciate their protection could be at risk.
The introduction of pensions automatic enrolment has also caused some confusion. If the employer has ‘reasonable grounds’ for believing an employee does have pension protection they may choose not to auto-enrol that employee.[5] However, if the employee is auto-enrolled, their pension protection can be lost, and they may not even be aware of it. There is a limited time in which an employee can opt-out again to ensure their pension protection remains in place. If someone opts out within the allotted time period, they are treated as if they were never a member of the pension scheme. Contributions are returned, protections are retained – no harm, no foul.
For a stand-alone Registered scheme it is quite often the case that the Principal Employer will act as both trustee and scheme administrator. While there are specific requirements for pension scheme trustees to have knowledge and understanding of relevant pension and trust legislation, this does not apply to Registered group life schemes. As a trustee, there is a legal obligation to act honestly and in accordance with the terms of the trust which sets up the scheme. This can prove challenging, particularly when it comes to dealing with the death of an employee. As Registered group life schemes are most often set up using a discretionary trust, the trustees must ensure they seek out all relevant information relating to the employee and their circumstances before identifying who should receive the lump sum benefit. While an employee may have indicated their wishes, this is not legally binding on the trustees.
For employers who are not confident about dealing with the many responsibilities required, many insurers now offer a ‘master trust’ arrangement. This is a Registered group life scheme which has already been set up with professional independent trustees who take responsibility for maintaining the trust, keeping it up to date and legally compliant, as well as reporting and the identification of beneficiaries in the event of a death. Employers join the scheme as a participating employer and will not need to register with HMRC.
This has many advantages, but may not suit everyone. In most cases, membership of the master trust will be dependent upon maintaining the policy providing cover with a particular insurer, and tailoring of the terms of the trust will not be permitted. However, if this is not an issue, the administration of the scheme can be drastically reduced using this option. Employers should seek appropriate independent financial advice as to whether this option is suitable for their needs. Alternatively, employers could engage the services of a professional trustee company independently. This would certainly allow them to tailor the scheme to their own requirements, but would have cost implications.
There is lively discussion within the group life industry about whether the current relationship between stand-alone employee benefit policies and pension legislation is fit for purpose. Group life is commonly considered the simplest product offered by group insurance providers, and Registered group life the most straightforward approach. As group life is rarely a consideration when changes are made to pension legislation, updates which make perfect sense to the wider pension world often lead to complications and unintended consequences when they are applied to a product for which they were not designed. Add in the barriers thrown up by government departments who do not make provisions for reporting and there is a case for employers to avoid the product, denying valuable protection to their employees because of bureaucracy completely outside of their control.
A recent example of such an oversight was the launch of HMRC’s review into the taxation of trusts. Despite trusts forming the foundation of all group life business and any changes to their governance having massive ramifications for the market, the industry was completely overlooked during the consultation. Similarly, changes to HMRC's online registration system have the potential to lead to schemes being de-registered with immediate consequences for group life cover. These moves make sense looking at the big picture in the pensions world, but are a huge headache to the industry. Would it be easier if group life benefits were decoupled from pension legislation altogether? A dedicated, straightforward tax regime which meets the objectives of the product and gives absolute clarity to policyholders and beneficiaries can hardly be considered a bad thing.
To summarise, Registered group life is a tax-efficient vehicle for employers to insure death benefits for their employees. Despite being generally regarded as the most simple of the group insurance suite of products, there are hidden pitfalls, particularly for trustees and scheme administrators, and legacy issues which can cause confusion. Many of these are the result of group life’s peripheral relationship to pension legislation, which lead to changes designed for one very large and widespread industry having knock-on effects on ours which can lead to unforeseen interactions between our product and the legal framework it operates in. Industry bodies work hard to ensure our products are not entirely overlooked by government, with varying degrees of success. One possible solution is to separate group life benefits from pension legislation and design a fit for purpose tax regime which stands alone and ensures certainty and simplicity for all parties.
[1] https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46001
[2] Swiss Re Group Watch 2019
[3] https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm161300#IDASHNSB
[4] https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm165300
[5] Pensions Regulator – Detailed Guidance for employers p25-26