Will the abolition of the Lifetime Allowance make Excepted Group Life Schemes redundant?

Despite many suggestions to the contrary over the past year, it is highly unlikely the abolition of the Lifetime Allowance will make Excepted Group Life Schemes redundant.

In this article, our pensions and incentives partner Kevin Gude explains why it’s unlikely, and how employers (and their employee benefit advisers) can continue to design and provide tax-efficient group life assurance schemes for staff that are fit for a post-Lifetime Allowance world.

A brief recap

It’s already more than a year since the Spring Budget 2023, when the Chancellor made the surprise announcement that he had decided to abolish the Lifetime Allowance (the “LTA”). The abolition came into full effect on 6 April 2024.

The LTA had varied over the years but had been fixed at just £1,073,100 since 2021. Applying to all pensions savings and lump sum death benefits in HMRC-registered pension schemes since 6 April 2006, it led to a tax charge of 55% being imposed upon lump sum benefits paid in excess of the LTA.

Over time, as a result of wage inflation and long service, the effect of the LTA began to affect an increased number of employees, particularly where their employer’s lump sum life assurance benefit was based on a multiple of salary that could be enhanced through a flex scheme.

Fortunately, statute made a valuable alternative solution available to employers, the Excepted Group Life Assurance Scheme, putting those lump sum benefits outside HMRC’s registered scheme regime and protecting them from the LTA excess tax charge.

That solution is still available, but why should it be considered if the LTA has been abolished?

Tax in a post-LTA world

It’s important to appreciate that the abolition of the LTA was aimed at ensuring that pensions income would no longer be affected by the LTA. It wasn’t the aim, and hasn’t been the effect, that lump sum death benefits would be granted that same advantage. Instead, the previous charge on any excess lump sum over the LTA has been replaced with a new charge on any lump sum payment over that same monetary amount of £1,073,100 as a new lump sum death benefit allowance. Replacing the fixed 55% charge is a charge at the lump sum recipient’s marginal rate of income tax, where the insured employee dies before age 75 and the lump sum is paid within two years of the employee’s death.

The LTA may have been abolished in name and may have been adjusted, but lump sum death benefits payable from an HMRC-registered life assurance scheme still continue to be susceptible to an excess charge. Depending on the recipient’s own income tax bracket and the value of the sum to be paid, the charge might still be as much as 45%.

Excepted Group Life Schemes

The abolition of the LTA has prompted some to query whether there would be any point to the Excepted Group Life option after April. However, the creation of the new lump sum death benefit allowance and the imposition of a marginal rate charge on any excess make a very strong argument for the maintenance of existing Excepted schemes. It might also encourage employers to establish new Excepted schemes in the interests of shielding their employees’ surviving dependants from unwelcome additional income tax charges during what can already be a time of financial and emotional difficulty.

If you are an employer, insurer or risk benefit consultant and have questions about setting up an Excepted Group Life Scheme, please contact Kevin Gude.