Pensions - Articles - 78% of employers unaware death-in-service impacts pensions

 Exceeding the LTA will lead to some significant tax penalties.

 To avoid such penalties being imposed on the majority of savers, the Lifetime Allowance was set at a high level when introduced in 2006, and was increased further to a high of £1.8m. However, recent Budget announcements have successively reduced the LTA to a low of only £1m from April 2016.

  

 On the face of it this may appear to have nothing to do with benefits other than pensions, but this overlooks the reality that often benefits payable under a Group Death in Service scheme can count towards the lifetime maximum.

  

 This hidden connection to the world of pension savings may start to bite after April next year. Lump-sum payments for higher-paid employees are often now set at multiples of four, eight or even 10 times salary. It is likely that some such payments will, by themselves, use up most or all of the Lifetime Allowance limit in the event of a members death.

  

 So, in a worst-case scenario, if a family bread-winner dies, and their dependent chooses to take the pension as a lump-sum benefit, the death-in-service payment can absorb most of the LTA, with the remaining amount being returned to the deceased’s family after a significant reduction in taxation.

  

 This issue is not widely understood by employers. Our survey evidenced that more than 3 in 4 respondents were unware of this important issue. We would urge all employers with Group Life policies to review their employee’s exposure to this important issue.

  

 Iain Laws, managing director for healthcare and group risk for Jelf Employee Benefits said: “The sole purpose of death in service benefits is to provide employees and their families with security should the worst happen. The on-going reductions in LTA mean it is essential that employers at least inform their employees of the rules and examine the suitability of the available plan designs to mitigate the application of LTA, and at best provide employees with access to guidance to help understand their individual situation.”