Typically, life assurance benefits (usually lump sums based on a multiple of salary which are paid when employees die in service) are provided through an employer’s occupational scheme or through a separate group life assurance scheme (both of which are registered pension schemes). However, following the recent reduction in the lifetime allowance a number of employers are considering whether to use an excepted group life assurance scheme (“EGLAS”) (historically a relatively rarely used pension arrangement) as a tax efficient alternative to providing their employees with life assurance benefits.
What is an EGLAS?
An EGLAS is set up as a discretionary trust which can hold one or more excepted group life assurance policies. Unlike the arrangements mentioned above, it is not a registered pension scheme and so it is not impacted by the lifetime allowance (i.e. the total amount of an individual’s benefits from all registered pension schemes in which s/he has accrued benefits which receive tax favourable treatment). Nor is it an “employer-financed retirement benefit scheme” (a non-registered pension scheme which does not benefit from the same tax privileged status as a registered pension scheme and which is often used to provide pension benefits to high earners).
Reduction in the lifetime allowance
The recent reduction in the lifetime allowance to £1m for the tax year 2016/17 (down from £1.25m in the previous tax year) means that many employers are faced with a higher number of employees who are nearing their lifetime allowance or who already have tax protection (for example, enhanced protection or fixed protection) and in respect of whom there would likely be a lifetime allowance charge (of up to 55% on the excess over the lifetime allowance) if death benefits are paid from the employer’s registered pension arrangement.
An EGLAS can provide employers with a cost-effective and tax-efficient way to provide death benefits to employees without members falling foul of the lifetime allowance charge or losing existing tax protection.
Pros and cons of an EGLAS
- cost-efficient and relatively straightforward to set up
- can provide death in service lump sum benefits to individuals who would otherwise suffer a lifetime allowance charge if the benefit was provided under a registered pension scheme
- an individual with existing tax protection will not lose this protection on becoming a member of an EGLAS (because it is not a registered pension scheme), and
- an employee who is an active member of an EGLAS and who obtains tax protection after having joined the scheme can receive death benefit cover without prejudicing their tax protection.
- the excepted group life policies which sit within an EGLAS must meet certain conditions in order to qualify as an excepted group life policy – this is important to ensure that the policy does not give rise to tax charges
- one such condition is that the method of calculating death benefits must apply equally for all individuals covered by the policy (i.e. there cannot be different multiples of salary covered by the same excepted group life policy) – this means that multiple policies need to be held under the EGLAS if different levels of cover are to be provided to different categories of employees
- another key condition is that tax avoidance must not be the main purpose of the policy, and
- employees benefitting from an excepted group life policy may be subject to tax liability in certain (rare) situations.
Given the recent change to the lifetime allowance, a number of employers are considering putting in place an EGLAS (or, indeed, have already put one in place) to provide death in service benefits for their UK employees. It seems to us that an EGLAS is fast becoming the pension arrangement du jour.
One point to watch for the future is that although we are not aware of HMRC currently seeking to challenge the validity of such arrangements on the basis of them having a tax avoidance motive, the risk of HMRC’s position altering in the future cannot be discounted, particularly as the appeal and use of excepted group life assurance schemes grows with the reduced lifetime allowance.