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Employers ‘exposing staff and beneficiaries to unexpected tax charges’

Excepted death-in-service cover can address issues around Lifetime Allowance
tax

Only a third of UK employers have taken action to address the impact of lump sum death in service benefits on the Lifetime Allowance by using excepted death-in-service cover, a survey shows.

Aon, which surveyed its client activity, warned inaction on this issue could have tax implications for beneficiaries who receive lump sum death-in-service benefits, and affect an employee’s retirement planning if their employer inadvertently invalidates their HMRC protection.

More employees are now being impacted by the Lifetime Allowance because of increasing pension values, higher levels of lump sum life cover, and a decrease in the Lifetime Allowance to £1,055,000.

For employers providing death in service benefits in an Optional Remuneration Arrangement (OpRA) environment, the government’s 2017 tax changes which impacted excepted, but not registered, life cover, are another complex aspect to consider.

OpRA is the new HMRC terminology which effectively replaces salary sacrifice.

Mark Witte, principal at Aon, said the potential fall-out of employer inaction could range from disgruntled employees and beneficiaries, to inadvertent loss of HMRC protection – which could cause significant financial impact at retirement.

“The concern is that if employers don’t know enough about this subject and don’t engage in the debate around providing lump sum death-in-service cover on an ‘excepted’ basis, then the impact could be far-reaching,” he warned.

The overall percentage of Aon’s clients taking action and using excepted cover has increased to 33% from 24% in 2016.

The main increase in activity has occurred in the small company sector (below 100 employees) where 19% have taken action (up from 4% in 2016), with the percentage of large companies (above 100 employees) taking action remaining stable at 45%.

For the small sector, where action has been taken, the fully excepted route remains the most common approach (39%). The lower percentage of large employers adopting this approach indicates a continued caution, although it has still increased to 19% from 12% in 2016.

For the large company sector (as in the 2016 survey) more than one criteria is often used when providing excepted cover. However, this has reduced since 2016, which may be due to a desire to simplify administration and/or communication, or as a direct result of the OpRA tax changes, Aon said.  

In the large company sector, the popularity of using a threshold approach (salary or sum assured) to determine excepted provision has also reduced to 35% from 59% in 2016.