Paul Avis: The Budget threat to group life as we know it

A consultation on the taxation of trusts could have massive implications for the tax breaks available on group life says Canada Life Group Insurance marketing director Paul Avis. The industry needs to start fighting now to get its voice heard

Group life assurance (GLA) is an amazingly tax efficient benefit. Lump sum benefits are paid to an employee’s survivors or nominated beneficiaries tax-free and fall outside of the deceased person’s estate. Premiums paid are tax-free for the employer.

But there is an exception, with salary sacrifice excepted policies treated as P11d/benefits in kind for employees following OPRA changes implemented in April 2017. So is there now a worry, and an opportunity, emerging from the small print in the Budget that we should all be aware of? And, as an industry, should we now be acting in a cohesive way to preserve these tax advantages whilst aiming to make us even easier to do business with?

In Budget small print it states, at paragraph 3.9 that ‘the government will publish a consultation in 2018 on how to make the taxation of trusts simpler, fairer, and more transparent’.

Then at paragraph 3.25, under a section badged ‘life assurance and overseas pension schemes’ it goes on to say that from April 2019, tax relief for employer premiums paid into life assurance products or certain overseas pension schemes will ‘be modernised to cover policies when an employee nominates an individual or registered charity to be their beneficiary’.

The immediate reaction was that this could potentially present a real opportunity for the removal of two types of schemes. Not having registered and excepted group life, is an immediate win. Additionally, to have a single, non-pension related approach to delivering this important benefit provision, thereby reducing the administration associated with PSTR numbers and the rest, would really help us to engage with employers new to our marketplace.

As an example, how many registered pension scheme trustees were aware that HMRC has been working on updating its Pensions Schemes Online (PSO) system? This required details of Pension Scheme Administrators (PSAs) to be updated by November 30th, 2017. This was most recently outlined in Pension Scheme Newsletter 92 , noting that claims, and even cover, may be at risk if a scheme is de-registered, as well as the potential for what HMRC describes only as “a substantial tax penalty.” The glass at this point is half full, so perhaps an opportunity to make a simple product even simpler?

The legacy and unintended consequences of registered GLA alignment with pensions scheme legislation has led to the popularity of excepted schemes. This is due to the impact of a lowering of the lifetime allowance – albeit appreciating this has been raised to £1.03m from £1m in 2018.

If there are worries about pension + death benefits being significant for survivors, perhaps a £1.5m ‘deathtime allowance” is the answer? We would query why even this is necessary when the person insured is not the beneficiary and we already have such a significant protection gap. ‘Keep it Simple’ is the key if we want to get more people covered.

Therein lies the ‘glass half empty’ possibility. If we move to excepted for all, or a new trust variant, does this lead down a route of GLA taxation? I doubt there are any worries about the GLA’s continuation as an allowable company expense but if, like salary sacrifice, it became a P11d/benefit in kind for employees, or the already complicated trustee charging on benefits is extended to all, will the product lose its attraction?

GLA is desperately needed and, in a 92 per cent under-penetrated employer market it provides a massive opportunity to protect the lifestyles of those who are left behind, gives peace of mind for those soon to die and helps remove worries from survivors about living on ever-reducing state benefits. We need more, not less, GLA.

Herein lies the conundrum: this will be a consultation in 2018 and so we do not actually know what the driving force is! GLA trusts, perhaps like healthcare trusts, are not necessarily the primary target as other types could yield a much greater a return to the Treasury if they were changed. Assuming that a death in service benefit, which is currently taxed as income to the recipient, is excluded from further potential taxation, and a ‘lump sum’ benefit tax of 20 per cent was imposed it would only return £175-200m a year, according to Government estimates, and so perhaps is not significant in the grand scale of things. So if we are not the priority and target then we need to make our voices heard – remember A- Day.

What we do know is that despite great industry-aligned responses on the salary sacrifice consultation itself, no Group Risk products were initially exempt and after the consultation we ended up with P11d/benefit in kind charges on both GIP and excepted schemes.

So this time let’s start early and whenever dealing with trade bodies and direct to Government we need to be talking about the complete preservation of the current, beneficial tax regime, removing all pensions legislation links and simplicity throughout – with no overly –technical or bureaucratic reporting. Then, and only then, will the glass be more than half full again.