Three out of four employers remain unaware of how a life insurance payment can impact on a beneficiary’s pension allowance according to new research from Howden Employee Benefits & Wellbeing.
This survey, taken earlier this year, followed the Budget announcement that the pension lifetime allowance will be frozen at just over £1m (£1,073,100) until at least 2026.
Howden’s points out that it has always been the case that group life insurance payments (on death) from a registered arrangement count towards an individual saver’s pension lifetime allowance entitlement.
Given this allowance has fallen from £1.8m in 2011 to just over £1m today, these payments could mean a beneficiary gets hit with a significant tax charge for exceeding this allowance.
Employers have the option of setting up an “excepted” group life plan as an alternative where payments are not counted towards the pensions lifetime allowance.
The survey also asked employers if they communicated details of the pension lifetime allowance when enrolling employees into a company-sponsored pension arrangement.
The research found that just 10 per cent of employers always referenced this allowance during the auto-enrolment process. The same number “sometimes” highlighted the issue, while 17 per cent relied on their nominated professional pension advisers to reference this issue.
More than six in 10 employers either don’t mention this allowance at all (20 per cent) or were not sure (43 per cent) on the actions taken by their employer in this respect.
Steve Herbert, head of benefits strategy, at Howden says: “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 four-times 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.”
He adds: “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.”
Matthew Gregson, head of corporate, at Howden adds: “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.”
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