As Excepted Group Life Policies (EGLPs) fall outside the registered pension scheme regime, they have become an increasingly popular solution for employers to provide life insurance to employees. This briefing provides a summary of the advantages and potential pitfalls associated with this approach.
Against the backdrop of recent reductions in the Lifetime Allowance and the rules around transitional protection, employers are looking for new ways of providing life assurance to their employees. As Excepted Group Life Policies (EGLPs) fall outside the registered pension scheme regime, they have become an increasingly popular solution for employers to provide life insurance to employees. This briefing provides a summary of the advantages and potential pitfalls associated with this approach.
While legislation provides that EGLPs cannot be used where the main purpose (or one of the main purposes) of the arrangements is to secure a tax advantage for the policy holder or beneficiary, a key difference between the EGLP regime and the registered scheme regime as a method of providing life assurance is in relation to taxation of the benefits. Providing life assurance through an EGLP has the following tax advantages.
- The amount of the tax-free death benefit is not limited by available lifetime allowance. An EGLP could therefore be used to insure death benefits for high earners. The lump sum death benefit provided through an EGLP does not use up any of the deceased’s lifetime allowance under the registered pension scheme regime, whereas the deceased’s lifetime allowance would be reduced by the value of a lump sum death benefit provided through a registered pension scheme.
- Enhanced protection is not jeopardised. Enhanced protection can be lost if either the payment of premiums or of a lump sum death benefit greater than the appropriate limit constitutes “relevant benefit accrual”. There is no such issue with life cover provided for those with enhanced protection through an EGLP.
- since EGLPs are not registered schemes, the trustee of an EGLP is also not subject to the registration, reporting and tax return requirements that would otherwise be required in relation to a registered scheme; and
- an EGLP does not have to cover all employees of the employer, so it can be used to provide life assurance benefits for particular groups of employees if that is more appropriate in the circumstances.
In order to qualify as an EGLP, certain criteria need to be met. These criteria restrict the way in which life cover can be provided through an EGLP, and need to be taken into account in drafting the relevant documentation. Key restrictions are as follows.
- The benefit from an EGLP may only be paid in lump sum form. Therefore, it is not possible to use an EGLP to pay dependants’ pensions. If a level of dependant’s pension was insured, that benefit would need to be paid as a capitalised lump sum from the EGLP; the policy itself cannot provide an income stream.
- The calculation of benefit under an EGLP must use the same formula for everyone covered by the policy. For example, it is not possible to insure a lump sum of four times salary for certain staff, and a lump sum of eight times salary for others under the same policy. It is, however, possible to use two or more policies under the same trust to achieve the same result, with only one benefit formula under each policy.
- EGLP cover cannot be provided beyond age 75. EGLPs can only provide cover up to age 75. For registered schemes, although there is no restriction preventing an individual taking lump sum benefits after reaching age 75, adverse tax consequences would apply in such circumstances when compared with taking lump sum benefits before age 75.
There will also be other legal and drafting/implementation issues to be navigated, for example:
- the terms of the EGLP itself and its interaction with existing arrangements will need to be carefully considered, to ensure that the EGLP trust deed is appropriately tailored to meet the specific circumstances of the employer;
- the rules of any existing registered schemes should also be reviewed and amended as needed. Rule changes to existing registered schemes may be needed to ensure that double benefits are not inadvertently payable;
- tailoring employee communications to any employees whose life assurance arrangements may be changing, and making sure any tax information given to employees is correct and appropriately caveated; and
- a data protection notification may be required in respect of the new trustee of the EGLP.