Why pension tax changes mean group life assurance is needed more than ever
From April 2027, payments on death from many types of pension savings will form part of an estate for inheritance tax (IHT) calculations.
The loss of these advantages relating to inheritance tax means that your employees should review their pension and life assurance provisions to ensure their loved ones have adequate protection.
The good news is that payments into an estate, or to individuals, from a group life assurance arrangement are not going to have IHT applied. This means that group life assurance could be a good way to plug any gaps caused by the extension of IHT to many types of pension savings.
What’s more, the changes should – open the gates for a modernising and reimagining of how corporates could provide life assurance benefits to employees.
Rule change imminent
Current rules allow pension savings to be passed on inheritance tax-free in most circumstances, but this is set to change.
Under current rules, on death before age 75, any unused pension savings your employees hold can be passed to their chosen beneficiary tax-free in most circumstances. On death after age 75, unused monies can still be passed on, but income tax becomes payable. This is at the highest rate of income tax the beneficiary pays.
These rules mean that pensions have, to an extent, represented a haven for wealth. Your employees might have built a pension pot that they planned to pass on to a beneficiary, with no intention of accessing some or all of these savings to fund their retirement.
From 2027, this will no longer be possible for many pension pots (although it’s worth noting that the current spousal exemption will remain in place when the changes take effect).
Many pension funds passed to an individual, or estate, on death could be subject to IHT at 40%, where the estate exceeds the nil-rate band. This change will mean that a significant percentage of individuals will now have an estate liable to IHT or a significantly larger liability than they expected.
This means your employees need to start thinking about new strategies now.
Inexpensive solution
Group life assurance benefits could provide a cost-effective way to plug the gap that the new rules create.
Changes to the IHT treatment of many types of pensions increase the importance of the employee benefits you offer – specifically, group life assurance.
This could provide a relatively inexpensive solution for you and allow your employees to use a payout to cover a potential IHT liability.
A death in service lump sum benefit was once calculated as a multiple of your employee’s salary, four times was the most common. Interestingly, this figure was based on historic and long-outdated tax rules, and the life insurance arena is changing.
Modern group life assurance schemes allow you, as the employer, to specify the lump sum benefit you’ll offer. This simplifies administration for your HR and employee benefits team and makes the process transparent for employees. This, in turn, allows your staff to view a potential payout within the context of their wider financial protection.
Life assurance needn’t be expensive either.
For your average employee with a salary of £40,000 with 4x salary cover this group protection will typically cost around £150 to £200 per year. This makes a group life assurance scheme a straightforward and cost-effective way to support your employee.
Retaining and attracting staff
Your employee benefits package is increasingly important for attracting and retaining staff.
Pension tax changes from 2027 mean that your employees should be revisiting their estate planning now. While the changes could be seen as disincentivising pension saving, they also provide you with an opportunity.
An attractive employee benefits package can help your business retain valued staff and attract top new talent. Additionally, with life assurance most employers really want to support families if a tragic death occurs and culturally many firms see supporting families after the death of an employee as really important.
This briefing note does not constitute advice and with tax and legislation often changing you should obtain advice from a regulated adviser before making any change to policies.
Supplied by REBA Associate Member, Secondsight
We transform employee benefits and pensions into meaningful outcomes for you and your people.
