Life insurance policies with death in service benefits typically fall into three types:
The most common type of life insurance offering death in service benefits. This type of policy, which must be registered as a scheme with HMRC, covers lump sum benefits payable on the death of an employee. The benefits are not subject to income tax or inheritance tax if distributed outright under a discretionary trust.
The problem with this type of life insurance is that on the death of a member (and under the age of 75), if the lump sum benefit paid to a beneficiary takes the member’s benefit from all registered pension schemes above the pension lifetime allowance (20/21 it is £1,073,100), then there is a tax charge of 55% on the excess amount.
In contrast, a Relevant Life Policy provides a lump sum benefit on the death of an employee. It is an alternative for employers to a registered group life scheme or it can sit alongside an existing scheme if the employer is willing to fund it or allow the employee to fund it using salary sacrifice. They are taken out and paid for by the employer subject to a Relevant Life Policy Trust. If the employee leaves, they can take the Relevant Life Policy with them to another employer or take over the payment of premiums themselves.
Legislation – Relevant Life Policies were created under the 2006 pension tax simplification legislation that came into force on the 6th of April 2006 (A-day). They are covered by the same legislation that deals with group pension schemes. However, unlike the schemes provided by most big employers, they are ‘non-registered’ so do not fall under pensions legislation.
The BENEFIT – returning to the above example of Mr Bloggs, if Mr Bloggs has a Relevant Life Policy instead of death in service benefit, then the £600,000 pay-out upon his death would not be added to his accumulated pensions. As a result, the pension Lifetime Allowance would not be breached and therefore no tax would need to be paid by their beneficiaries. In this example, the tax saving would be £152,295.
Summary of Benefits with Relevant Life Policy
How a Relevant Life Policy can cut company costs
The example below assumes that the Company adds £1,000 to the individual’s salary so they can pay for life cover through their net pay. The actual net cost of this is £1,589. In the Relevant Life column, we see the effect of the employer paying for the premiums, a difference of £779.27.
An Excepted Group Life Policy is in all material respects, identical in character to the Relevant Life Policy, except that it is designed for a group of employees as opposed to a single employee. The principal distinguishing feature between it and a Registered Group Life Policy is that a lump sum benefit provided by an Excepted Group Life Policy does not count towards a member’s lifetime allowance. Otherwise, it shares the same characteristics as a Registered Group Life Policy.
Who are Relevant Life Plans ideal for?
Having the right life insurance death benefits in place could save pension beneficiaries thousands of pounds in tax. Employers should investigate switching life insurance death in service policies for relevant life policies or operate a traditional death in service benefit alongside Relevant Life or Excepted Group Life Policy. If you have any question or would like to know more, please get in touch.