Cover conundrum

In this issue, we examine the main differences between two methods of providing life cover for employees – group DIS and an excepted group life policy

For many years lump sum life assurance benefits were provided by a Group Death in Service Arrangement (Group DIS) written under occupational pension rules. Prior to April 2006 for many individuals their benefits were subject to the earnings cap introduced in 1989. As this caused more and more of an issue ITEPA 2003 introduced the concept of a relevant life policy or, for the provision of group cover, the excepted group life policy (EGLP).

The main differences between these two methods of providing life cover for employees are summarised below:  

• Maximum employee age

There is nothing within FA 2004 that restricts tax relief in respect of pension costs paid by employers to employees below the age of 75. However, section 481 ITTOIA 2005 specifically sets one of the conditions for an EGLP as being “under the terms of the policy a sum or other benefit of a capital nature is payable or arises - (a) on the death in any circumstances of each of the individuals insured under the policy who dies under an age specified in the policy that does not exceed 75”

As cover must cease not later than age 75 there can be no tax relief on contributions in respect of an employee who has attained age 75.  

• Lump sum payments included within the LTA

As a registered pension scheme, the payment of a lump sum death benefit, prior to the late member attaining age 75 and where it is paid within the “relevant two-year window” is assessed against the member’s remaining lifetime allowance under benefit crystallisation event (BEC) 6.

However, if permitted under the rules of the group DIS arrangement, if the payment is delayed until the “relevant two-year window” has elapsed, there will be no BCE, but the resultant payment of benefits will be subject to income tax in the hands of the recipient and taxed, currently, at 45%. As an EGLP is not a registered pension scheme, all benefits are paid tax-free without reference to the lifetime allowance.

• Joining invalidates enhanced/fixed protection

As most group DIS arrangements will be deemed to be providing benefits on a defined benefit basis the payment of premiums does not compromise either enhanced protection or fixed protection. However, both these forms of transitional protection are lost where an individual joins a registered pension scheme other than:

-    to receive a permitted transfer;

-    as part of a retirement-benefit activities compliance exercise; or

-    as part of an age-equality compliance exercise.

So, in simple terms, if individual A, with enhanced/fixed protection, joins a new employer’s group DIS they will have joined a registered pension scheme and invalidate their enhanced/fixed protection as it was not covered by one of the above three concessions.

However, as it is not a registered pension scheme, joining an employer’s EGLP, will not result in the loss of enhanced or fixed protection. 

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