Independent financial services consultancy Quantum Advisory has urged employers to re-evaluate expected group life assurance arrangements in the lead-up to the abolition of the lifetime allowance (LTA) on 6 April.
It has expressed concern that many employers do not have a full understanding of the potential tax charges going forward.
The new lump sum and death benefits allowance (LSDBA) will be £1,073,100, the equivalent to the current LTA, unless a member has a form of protection in place, which will give them a higher LSDBA.
Graham Yearsley, principal consultant at Quantum, said: “Many employers have implemented excepted group life assurance arrangements for their employees. These group life schemes are trust-based and provide for a lump sum to be payable in the event of death in service.
“As they are not registered pension schemes, they have become very popular with high-earning employees as they are not tested against the current LTA.
“While lump sum death in service benefits will no longer be tested against the LTA, members of a registered pension scheme from 6 April 2024 will be tested against the new lump sum and death benefits allowance (LSDBA).
“As the LSDBA will be subject to the deduction of relevant benefit crystallisation events, of which an authorised lump sum death benefit is one such event, any excess death in service lump sum above the new LSDBA will be taxed at the recipient’s marginal tax rate, which could reach 45%.
“This will make a big difference to both employer and employee.
“There is clearly still a need for excepted group life assurance, and it’s very concerning that employers may not understand the potential tax charges associated before making a decision on who should continue to be insured in that arrangement.
“This could lead to significant issues going forward. Employers must evaluate all potential tax charges soon and decide if they are still fit for purpose as an option for their employees.”