However, knowing the best way to offer it to staff isn’t as clear-cut as it could be, says GRiD, the industry body for group risk protection benefits (employer-sponsored life assurance, income protection and critical illness).
Provided the payments to beneficiaries are paid through a discretionary trust, they do not form part of the deceased’s estate so can be paid quickly (without the need for probate) and free from inheritance tax (IHT). For many years, the way to do this was to use a discretionary trust written under pensions legislation.
Ironically, the introduction of the pension tax simplification regime in 2006 introduced some complexities for group life assurance. Excepted Group Life Policies (EGLPs) provide a simple alternative way of arranging life cover independent of a pension. For some people, particularly those who had protection for their pension tax position, life assurance could be provided more efficiently in this way. This means that benefits are disregarded when assessing pension tax charges. As the value of the Lifetime Allowance (LTA) has eroded and the simplicity of a non-pension arrangement has appealed to more employers, an increasing number of employees have been enrolled into EGLPs.
However, EGLPs can have drawbacks: the discretionary trusts holding them are subject to possible entry, exit and periodic charges and can be complex to administer. As a consequence, employers have to pay for expertise in setting them up and monitoring them.
It can also be extremely difficult for executors to accurately complete IHT forms if an EGLP benefit has been paid as it falls between the available reporting forms and the executor is unlikely to know how the policy was arranged in any case.
Number affected
The number of employees covered in EGLPs - so potentially affected - is 782,674, across 7,130 schemes*.
Cost to employers
The cost of administering the reporting and collection of taxes far exceeds the amount collected. Government figures show that the amount collected each year is no more than £1m. Yet, annually, the cost of administration is estimated to be £1.75m, to which can be added the cost of legal and technical advice. This figure is estimated to be close to £24m, paid over a number of years.
Benefits for SMEs
GRiD believes reducing compliance, legal and administrative costs in this area will both save employers money as well as encourage more SMEs and other businesses to provide cover for their employees. SMEs may well be put off of doing so because of the perceived cost, yet this sector often has the most need to provide GLA. Many SMEs are family-run businesses, and when employees die unexpectedly they often fund expenses from their own pocket. Providing death-in-service benefits helps protect them as well as their staff.
What is GRiD doing about it?
The Office of Tax Simplification (OTS) has called for evidence and experiences about perceptions of Inheritance Tax. GRiD has responded, laying out the benefits of GLA, and in particular EGLPs, for employers, employees and society as a whole.
By providing quick financial support to dependants, the death benefit supports the aim of building resilient households and may lessen any potential call on state support. As these products are provided in an employment context, cover is frequently provided for many employees without medical evidence so that it is inclusive for those with some health problems who may not be accepted for a personal policy or only with an extra charge. For many people, particularly low- to middle-earners, this can be the only protection cover they have and ensures that they or their families do not fall back on the State.
GRiD has called for:
An exemption from potential entry, exit and periodic charges to IHT when the sole asset of a discretionary trust is an EGLP
Removing the requirement that all members of an EGLP have the same benefit calculation
Aligning the potential beneficiary classes for EGLPs and benefit-in-kind rules
Katharine Moxham, spokesperson for GRiD said: ‘Group Life Assurance is a very popular benefit. It’s often one of the first protection benefits that employers offer their staff: it’s easy to understand, and provides a tangible financial benefit. The last thing we want is to put off employers from offering it, or add to their costs for doing so. We want to make it easier for employers to look after their staff, this has a direct benefit to Government so we hope they take our recommendations on board.’
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