Why death benefits are crucial for financial wellbeing and engagement
It’s natural when considering financial wellbeing to focus on ‘money now’, like salary and bonus, or savings and pensions for ‘future money’. One thing that’s easy to forget – but often one of the most effective ways to engage employees with their finances - is, ‘money if the worst happens’.
Humans don’t seem to be great at thinking about their own financial wellbeing, even when prompted to do so. Thinking about their family is often a different story.
A colleague worked on a defined contribution (DC) pension scheme and, following a corporate acquisition, was travelling round the country to explain benefits of membership to employees. In the first session, she explained the generous employer contribution structure and what retirement benefits could look like. Feeling the pressure of presenting to an audience of media industry professionals, she could sense a lack of engagement. But when she reached the part about benefits payable to dependants if the member died, almost immediately the energy in the room shifted up several gears.
To this group of employees death was a big thing. They worried about what would happen to their families if the worst happened. It turned out they were camera operators and reporters who could be sent to a war zone at a moment’s notice. They couldn’t get life assurance as individuals, and couldn’t believe they’d get cover simply by joining the pension scheme!
This may be an extreme case, but the essence is true for more employees than you’d think. Some people will be concerned about their partner being able to keep paying the mortgage, others about maximising the amount that can be passed to their family tax efficiently.
Abolishing the lifetime allowance – what’s the impact?
In this year’s Spring Budget, the government announced the lifetime allowance (LTA) would be abolished in April 2024. It was introduced originally to limit the ability of high earners to take advantage of tax-free pension savings, and the abolition now is intended to incentivise individuals to stay in work longer, or return to the workforce, to further maximise their pension savings.
The abolition will remove the current limit of £1,073,100, and instead use the existing framework for pension taxation, but with the LTA ceiling as a threshold for taxation to kick in. You’ll pay no tax on anything up to £1,073,100 and your marginal rate applies on anything above. This, in turn, removes the long-standing 25% tax-free lump sum method that’s been in place for years.
For death benefits, the abolishment of the LTA raises an interesting question: will excepted life assurance policies still be relevant? Answering that question requires an understanding of the differences in life assurance schemes and why excepted life policies were first created.
The more well-known group life policy would adhere to the new tax guidelines and the £1,073,100 limit. Excepted life policies were created to make a trust outside of the LTA limit, and therefore maximise tax-efficiency for high-earners. So why still have them if the LTA is abolished?
The new tax rules apply in a group life policy – tax-free lump sums up to the old limit and then taxed at marginal rate on money above that. With excepted life policies, that taxation would not apply. They continue to exist and serve the same purpose as they did when the LTA was in force – taking the lump sum and removing it from the LTA or pension taxation question. High-earners and any individuals close to retirement with over £1,073,100 in their pension would still find their beneficiaries, families and estates best served in an excepted life policy.
Death benefits really are important to almost everyone and deserve to be given more attention in a financial wellbeing strategy than they often are.
Supplied by REBA Associate Member, Vidett
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