It is typical of the lack of interest and understanding that UK government has shown towards group risk that some of the best potential news the sector has enjoyed for years arose as the unintended side effect of a Budget pensions change instigated primarily to save the NHS from doctors retiring early.
The group risk community has for a long time tried to highlight to government that an archaic link between pensions and group life cover serves no useful purpose and makes group life unnecessarily complex – therefore undoubtedly inhibiting demand.
For no good reason, lump sum pay-outs from registered group life schemes have counted towards the pensions Lifetime Allowance (LTA). If the LTA (currently £1,073,100) was breached this created a tax charge of 55 per cent.
This led to the growth in popularity for high earners of excepted group life schemes that avoided this problem. But they involve considerable downside in being subject to 10-year reviews and potential trust charges at review or closure.
The March 2023 Budget announcement that the LTA will be removed altogether in April 2024 therefore bodes well for group life. The 55 per cent tax charge is also understood to be disappearing then but for the time being has been replaced with an Income Tax charge at the individual’s highest marginal rate.
Rare listening
However, it seems there can be no announcement nowadays without an immediate U-turn. The initial HMRC guidance provided on 27th March stated that trustees would have to establish the amount of LTA left before a lump sum benefit can be paid.
Nevertheless, after listening to protests about how this would result in delays in claims being paid, new guidance issued on April 5th advised that schemes should continue to use the current process for reporting lump sum benefits from registered group life schemes in excess of 50 per cent of the LTA.
The ability of HMRC to listen on this occasion certainly seems a welcome change from the deaf ears it has shown to group risk in the past and may be explained by the fact that it was being lobbied not just by industry body Group Risk Development (Grid) but also by other stakeholders in the Lifetime Allowance Working Group – which Grid joined shortly after the Budget.
Grid spokesperson Katharine Moxham says: “We are very pleased to have had some impact along with other stakeholders and, on this occasion, the fact that we were able to get onto a working group has been key as to whyHMRC has listened. We would join other working groups if they were available.”
Furthermore, anyone who assumes that contacts made by Grid during this exercise will count positive for other future group risk discussions may be disappointed.
“Government officials nowadays tend to work largely on a project basis,” continues Moxham. “So, you don’t tend to build up useful long-term relationships.”
Should the LTA indeed be abolished next April and registered group life schemes removed from any sort of tax charge, the greater simplicity should enable more employers to take out group life without needing advice.
Steve Herbert, wellbeing and benefits director at Partners&, says: “Employers won’t have to worry about the LTA being exceeded, and I genuinely wouldn’t then be able to think of a good reason for having an excepted scheme. There is no real difference in cost with registered schemes.
“Remember also that a lot of employers have had clunky high-earner schemes in place for those who exceeded the LTA. Most of these can disappear, so they will hopefully be able to spend the money on other things like group income protection and group critical illness cover.”
In limbo
But, for the time being, too many question marks remain for much action to be taken by employers. The Labour Party, which could be elected to power in or before January 2025, did not respond to a request from Corporate Adviser to comment. However, it indicated shortly after the Budget that it intends to reintroduce the LTA.
There is also no actual guarantee that the current Government’s intention to abolish the LTA and tax charge in April 2024 will actually be carried out.
Chris Morgan, head of group protection distribution at AIG Life, says: “The Government has said the LTA will be abolished in April 2024, but it hasn’t clarified the impact on death benefits. It hasn’t officially said whether the Income Tax charge will|continue after April 2024, and you can’t entirely rule out another tax instead.”
This lack of certainty has left the group life field in a state of limbo, which is likely to continue until the legislation actually changes and political uncertainties subside.
Nick Homer, head of market management, corporate risk at Zurich, says: “There has been little action, and our experience is that the market is keeping things very much as they are. People are treading with caution and haven’t undertaken any significant reviews of current arrangements.”
Communication questions
Intermediaries are certainly not being bombarded by calls from clients enquiring as to what action they should take.
David Williams, head of group risk at Towergate Health & Protection, says: “A lot of clients didn’t make the group life connection with the LTA announcement about pensions. But we are putting out communications saying it could affect group risk and that we’ll keep them informed and let them know when they need to do something.”
Most intermediary comment therefore tends to focus on what the Government ideally should have done rather than what it has done.
Williams opines that, whilst Jeremy Hunt has been talking about getting early retirees back to work, his real focus should be on getting sick people back into the workplace. Because many sick people are much younger than early retirees, there would be much longer-term gains.
Stephen Ellis, head of employment benefit consulting at Prosperis, sees now as the time to reiterate the age-old argument that the Government should have just taken life assurance out of the pensions regime, regardless of the LTA.
He says: “Doing this would save HMRC a lot of work. The whole life and pensions link is antiquated. I’ve flagged it outside of Grid when I was active politically and, although my local MP appeared to listen, nothing resulted.”
However, feedback from Grid suggests that breaking this link has now become a lesser priority than putting pressure on government to simplify excepted schemes – a move which would require less legislation.
If excepted schemes no longer had to involve 10-year reviews and potential trust charges there would be no real disadvantage in having them, so the industry would achieve similar simplicity.
However, the Government has so much on its plate at the moment that no-one should be holding their breath. It will doubtless be prioritising issues that affect votes and, as the average voter hasn’t even heard of an excepted scheme, this clearly isn’t one of them.
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