One Pension Consultancy. Group Life Assurance. An employer s guide to providing a Group Life Assurance Scheme CG2/12

Transcription

1 One Pension Consultancy Group Life Assurance An employer s guide to providing a Group Life Assurance Scheme CG2/12

2 What is a Group Life Scheme? This is effectively an arrangement established by an employer to provide benefits on death in service in respect of an employee. Usually the scheme is insured with an insurance company but companies can choose to self-insure. This means that in the event of a claim they will be responsible for paying the benefit out of their own funds. This is generally an insured benefit which means that the policyholder (always the employer) will pay a premium in return for payment of any claims in the event of the death of an employee covered under the scheme. Although it is referred to as death in service, benefits are payable regardless of whether an employee is physically at work at the time of death. This type of scheme is usually paid for in full by the employer. Who can be covered? All employees can be covered under such a scheme and in some cases equity partners (who are effectively classed as self-employed) can also be covered. This type of scheme is not generally extended to an employee s spouse or family. Each scheme will need to specify the eligibility criteria. For example, this could be all employees aged between 16 and 65. The maximum age that employees can be covered to under this type of policy is aged 75 although some insurers may impose a lower age of 70. What benefits are provided? Benefits from this type of scheme tend to fall into two categories as follows: Lump sum This is usually expressed as a multiple of salary (e.g. 6 x salary) but can be a fixed lump sum (e.g. 250,000). Some schemes will set different benefits for different categories of employee. For example, 6 x salary for pension scheme members and 4 x for non-members. Note that categories cannot be determined by anything that might be classed as discriminatory (e.g. male or female, employees over or under a certain age). Before 2006 the maximum benefit that could be provided was 4 x salary (which may have been subject to an earnings cap). These limits no longer apply and technically there is no maximum on the benefit that can be insured although there may be tax implications on sums above a certain level and individual insurers may impose their own maximum. That said, 4 x salary still continues to be a common benefit basis for this type of scheme.

3 Spouses or dependant s pension This is an annual pension figure that will be paid to the members spouse or dependants. Where the pension scheme provided by a company is a Group Personal Pension or Group Stakeholder Pension or an Occupational Money Purchase Scheme, the pension insured is usually expressed as a percentage of salary (for example, 25% of salary). Except in the case of pensions payable to children (see below) the pension will continue to be paid to the spouse/dependant for the rest of their lives. Where the pension scheme provided by a company is a Defined Benefits scheme, the pension insured is usually expressed as percentage of the employee s pension (e.g. 50%). This can be of either the employees prospective pension at retirement or the pension accrued to date. Prior to 2005 the pension had to increase once in payment. For most schemes, this requirement has now been removed but the majority of companies still include escalation in one form or another. Escalation will still be required if your scheme is covered under the rules of your pension scheme or if it is based on a percentage of pension. For more information please refer to our booklet Establishing a Group Life Assurance Scheme. How is a Group Life scheme established? This type of scheme must be established under a trust arrangement. A trust is effectively an arrangement whereby one or more parties (known as the trustees) hold assets on behalf of others (known as the beneficiaries). With a trust arrangement, the trustees must act in the best interests of the beneficiaries. There will be a formal Trust Deed and Rules or Declaration of Trust which will set out the basis of how the scheme operates and the benefits it will provide. The scheme will also need to be registered with HM Revenue and Customs (previously known as the Inland Revenue). Trustees duties in this respect are minimal and provisions applying to pension schemes (for example, the requirement to have Member Nominated Trustees) do not apply to this type of arrangement. How are benefits paid? A dependant s pension can be paid either direct to the recipient or else it can be paid to the trustees who will then pay it on to the dependants. Usually the pension will be paid directly to the dependants. In the event of a claim, the lump sum benefit must be paid to the trustees (although some insurers will allow them to sign a disclaimer to allow direct payment or payment to the policyholder). The trustees are then responsible for distributing the lump sum in accordance with the deceased s wishes. We recommend that a company encourages employees to complete a nomination form (also known as Expression of Wishes Form) and for them to keep this up to date. This will set out

4 who they want the money to go to. Employees can nominate whomever they wish on this form (e.g. spouse, parents, children, friends, charity). In the event that an employee dies without leaving a nomination form then it will be up to the trustees to determine who should receive the lump sum. Regardless of whether or not there is a nomination form, it must be at the trustee s discretion as to where the benefit should be paid. This helps ensure that the lump sum does not form part of the estate for Inheritance Tax purposes. To whom can a dependant s pension be paid? The scheme rules for each scheme will determine to whom the benefit can be paid. The HM Revenue & Customs sets out those who can potentially receive this benefit as follows: A person who was married to the member as at the member s date of death. A child of the member who is under 23, or older if the scheme administrator thinks the child is dependent due to a physical or mental impairment. A person, who in the opinion of the scheme administrator, was financially dependent on the member, had a mutually dependent financial relationship (e.g. shared mortgage/living expenses) or was dependent on the member due to a physical or mental impairment. A scheme can choose to be more restrictive than this (e.g. by allowing payment solely to a legal spouse/civil partner) but cannot opt to provide this benefit to anyone who falls outside this definition. What are the tax implications? The premium paid by the employer to the insurance company is allowable as a business expense. The employee is not taxed on the value of this benefit. The proceeds of any claims should avoid Inheritance Tax if paid out as outlined above. There may be a further tax charge for those with large payments. This will be if the total lump sum paid out, including the value of any pension funds the employee may have, exceeds the Lifetime Allowance there will a tax on the excess. The Lifetime Allowance for the 2012/13 tax year is 1.5 million. The tax rate on benefits in excess of this is 55%. Dependant s pensions are excluding from this calculation. So for example, if the member had a salary of 250,000 per annum and the benefit basis was 4 x salary lump plus, plus a spouse s pension of 25% of salary and in additional pension fund values of 500,000 and 400,000, the follow would apply: A lump sum of 1,000,000 (i.e. 250,000 x 4) would be tested against the Lifetime Allowance. The spouse s pension would be ignored.

5 The two pension funds of 900,000 in total would also be tested against the Lifetime Allowance. Hence the total to be tested against the Lifetime Allowance would be 1.9 million. This exceeds the Lifetime Allowance by 400,000 and tax at 55% would be charged on this figure. Any spouse s/dependant s pensions payable will be taxable as income in the hands of the recipient. Glossary of Terms Unit rate This is the rate that determines the overall cost of the scheme. This is usually expressed as a percentage of total salary roll but may also be expressed as a percentage of total benefit. Typically unit rates are guaranteed for two year periods. Free Cover Level Group Schemes will allow members to be covered for a certain level of benefit without the need to provide any medical evidence. This is known as the Free Cover Level. Typically, the higher the number of members under a scheme, the higher the Free Cover Level. Medical underwriting will usually be required on any benefit in excess of the Free Cover Level. Actively at work This is a requirement for any new scheme and usually when an existing scheme switches insurer. Basically, this means that an employee must be actively at work (i.e. not absent from work due to illness or injury) in order to be covered for benefit. The actually definition will vary between providers. For example, some may require an employee to fulfil this criterion for a number of days before benefit can be provided.

6 How can One Pension Consultancy help? One Pension Consultancy have a wealth of experience in advising on this type of arrangement and were shortlisted for the following awards: Finalist for Small Corporate IFA of the Year 2011 (Corporate Adviser) Finalist for Group Income Protection Adviser of the Year 2011 (Corporate Adviser) Finalist for Group Risk Adviser of the Year 2011 (Corporate Adviser) Shortlisted for Small IFA of the year 2010 (Money Marketing) Finalist for Small Corporate IFA of the Year 2010 (Corporate Adviser) Finalist for Group Income Protection Adviser of the Year 2010 (Corporate Adviser) Finalist for Small IFA of the year 2009 (Cover Excellence Awards) Some of the standard services we provide are as follows: Advice on benefit design to provide a scheme to meet the needs of your business, your employees and your budget. Negotiation with providers to obtain the best possible costs and conditions for your scheme. Bespoke, user-friendly member communication explaining the benefit to the employee. Not only can this help ensure that the benefit is understood and valued but also that your businesses liabilities are clearly spelt out. This is usually designed to dovetail with your communication material for other employee benefits. Claims management and claims analysis. Advice on legislation and the requirements of your business and your scheme design. Southampton Reading Birmingham 2 Venture Rd Sunfield Business Park Aspect Court Chilworth New Mill Rd 4 Temple Row Southampton Finchampstead, Berks Birmingham SO16 7NP RG40 4QT B2 5HG Tel: Tel: Tel: The information contained in this document is based on One Pension Consultancy s understanding of legislation and proposals as at July This document is for information purposes only and does not constitute advice.