Group life pension Isa worries overcooked – Ritchie

John Ritchie, Ellipse
John Ritchie, Ellipse

The Government must create a new tax-advantaged framework for group life in the event it abolishes pensions tax relief, or risk being accused of taxing widows and orphans, Ellipse chief executive John Ritchie has warned.

But Ritchie says predictions of chaos for the group life sector in the event of the pension tax relief system being replaced by a pensions Isa approach are overcooked, arguing Government can be expected to act to ensure such an unintended consequence does not happen.

Ritchie’s comments follow concerns being raised that the group life sector faces considerable upheaval if pension legislation is amended to accommodate a pension Isa system at the expense of pension tax relief.

The Chancellor’s long-term plan for an overhaul of the pensions system could have massive ramifications for the group risk sector, with workplace protection benefits potentially losing their tax privileges unless alternative models are approved by Government. Experts have suggested group life benefits could become subject to P11D, meaning members would need to be given the choice to opt out, creating significant underwriting challenges for the industry, if pension Isas replace tax relief. Such a move would also remove eligibility for death benefits.

Group risk experts are divided over whether a wholesale move to excepted life schemes will solve the problem, with some fearing the prospect of 8m new members within schemes potentially attracting HMRC’s attention.

But experts also expect some form of new concessions from Government in the event that a pension Isa system is adopted. The Government has as yet unveiled no plans to introduce a pension Isa, but was reported by national press to be about to do so ahead of the Budget, prompting frantic lobbying from the pensions industry.

Ritchie says: “We are seeing a rush of organisations looking for a split arrangement between excepted and registered, and we are building an excepted trust to accommodate that.

“Yes, the Government should tidy up the legislation around group life. When the Government looks at this on balance they will see it would be a huge backwards step to damage benefits that offer so much protection to UK workers and their families.

“Do we want death to be a chargeable event for widows and orphans? That would be politically crazy.

“I think thought leaders are getting in a tailspin here. I do think the Government will massively scale back pensions tax relief here. But they will remedy this problem. This is an unforeseen consequence that will be addressed in the way they introduced lifetime and fixed protection to address unforeseen consequences in the past.

The Ink Group managing director Billy Johnson says: “It is time to rationalise legislation around group risk and it would be nice if it was no longer linked to pension legislation. Excepted schemes are certainly one solution, and for HMRC to change direction on whether they are an acceptable way to manage group life schemes would be throwing the baby out with the bath water. But the one line of regulation it is hard not to keep coming back to is the ‘is the vehicle set up solely for the purpose of tax avoidance?’”.

Punter Southall Health & Protection Consulting senior risk consultant Paul White says: “If the Government does go all the way with the abolition of pension tax relief the question is, where do you put everyone? An excepted scheme for everyone is not the right place. The industry demands clarity.

“There is not a problem yet, because they have not said that pension tax relief, and the lifetime allowance with it, are going to be abolished. But if it does happen, we will need to make clear the proposals we think should be adopted.”