Does your employer provide a Death in Service Scheme? Avoid a 55% tax charge
The majority of employers are unaware that death in service lump-sum benefits can contribute to an individual’s pension Lifetime Allowance.
In this March 2015 Budget statement, the Chancellor announced a major reduction to the pension Lifetime Allowance (LTA) level. Therefore, this new level now stands at £1m. The Lifetime Allowance is effectively the maximum amount of tax-relieved savings that an individual can build up over their lifetime. Exceeding the LTA will lead to some significant tax penalties.
On the face of it, this may appear to have nothing to do with benefits other than pensions. However, this overlooks the reality that benefits payable under a Group Death in Service scheme can count towards the maximum. This comes with a potential tax charge of 55% on any value over the LTA. Therefore, this is an area worthy of further investigation and review.
Lump-sum payments for higher-paid employees are often now set at multiples of four, eight or even 10 times salary. It is likely that some such payments will, by themselves, use up most or all of the Lifetime Allowance limit. This is in the event of a member’s death.
Consequently, retirement planning has always required re-visiting on a regular basis. Specifically, this is to track fund performance to ensure growth that is in line with expectations. This can also provide you with an overview of how well your money is doing. Your Financial Adviser will have informed you of your options at retirement and outlined the tax implications of various methods of obtaining the funds at retirement, but may have overlooked the implications of any death in service benefits.
The solution?
HMRC has allowed the utilisation of ‘excepted’ life policies which can avoid this problem as these policies fall outside of the pension legislation, and therefore do not contribute towards an individual’s Lifetime Allowance.
Often referred to as Relevant Life Plans, these can be written alongside an existing death in service scheme, or can be offered on an individual basis. As with Death in Service, the premiums are not treated as a benefit in kind to the employee, and are tax relievable for the employer.
If you are an individual or someone responsible for your company’s Death in Service Scheme it is essential that this is reviewed.
IEP work with many companies that have death in service schemes and have been able to set up arrangements where the breaching of the Lifetime Allowance is likely or has already happened.
If you have any queries with this and would like to speak to one of our Independent Financial advisers, we would be happy to help. Please contact us on 01273 208813 or by email [email protected]
For more financial information like this and to sign up for our newsletter please click here
IEP Financial are authorised and regulated by the Financial Conduct Authority (FCA)
The value of investments can fall as well as rise and past performance is not a guide to the future. The content of this publication is for information only. It does not represent personal advice or a personal recommendation, and should not be interpreted as such. Please do not act upon any part of it without first having consulted an Independent Financial Advisor.
