It has always been the case that Group Life Assurance payments (on death) from a Registered Arrangement count towards an individual saver’s Pension Lifetime Allowance entitlement. Yet a recent survey by consultancy Howden Employee Benefits & Wellbeing (Howden) has found that almost 3 in 4 employers (73%) remain unaware of this potentially important issue.
The survey, which took place in March this year, followed the Chancellor of the Exchequer’s Budget decision to freeze the Pensions Lifetime Allowance (PLA) until at least 2026. The PLA is currently set at just over £1m, far below its highest level of £1.8m in 2011.
Commenting on these findings Steve Herbert, Head of Benefits Strategy, at Howden said;
“The Pensions Lifetime Allowance has reduced significantly since it was first introduced in 2006, and as a result is now starting to impact far more savers on relatively modest salaries. This of course means that a lump-sum payment of, say, 4 x salary from a registered Group Life Assurance scheme might well breach the PLA limit, in turn triggering a significant tax charge in the event of a claim.”
Howden point to the well-established option of “Excepted” Group Life plans as an alternative option. Payments from such an arrangement will not count towards the Pensions Lifetime Allowance limit, thus avoiding this particular issue at a time of great distress for the employee’s family.
“Howden encourages employers to review their exposure to this situation, and take corrective action as necessary. As ever there are a number of complications for sponsoring employers to understand and consider, so we would urge employers to seek professional assistance as part of this review.”
The survey also asked employers if they communicated details of the Pensions Lifetime Allowance when undertaking their legal responsibility to enrol employees into a company-sponsored pension arrangement. The research found that just 10% of employers always referenced the Pensions Lifetime Allowance during the auto-enrolment process. The same number “sometimes” highlighted the issue, and 17% relied on their nominated professional pension advisers to reference this issue. More than 6 in 10 employers either don’t mention the Pensions Lifetime Allowance at all (20%) or were not sure (43%) on the actions taken by their employer in this respect.
Commenting on these findings Matthew Gregson, Head of Corporate, at Howden said;
“This issue is symptomatic of the challenges facing employers in ensuring that their best intentions in offering a generous benefits package to their employees doesn’t have unforeseen consequences or negatively impact the employees’ perception of the quality of the offer.
Higher levels of life cover and generous pension contributions are valued by so many employees, but they will expect their employer to have considered and planned for all scenarios, such as ensuring the employee isn’t caught with any unnecessary tax burden.
I would encourage employers to make sure they are fully aware of the implications of their employee benefits design and which employees might be negatively impacted. And if they don’t know where to start, then take advice and ensure that any suggested remedial action is taken.”