Group Life Assurance: What does the abolishment of the lifetime allowance mean for your scheme? 

Although this was anticipated, bringing an end to a transitional period, it’s now important for employers to be fully prepared for the impact on their Group Life Assurance (GLA) schemes.

In this article, we discuss the abolition of the Lifetime Allowance (LTA) and a general interpretation of the new regime that is set to replace it, including the implications for excepted schemes and protected individuals.

When the remaining LTA requirements were removed from 6 April 2024, they were replaced with two new allowances, which includes the Lump Sum and Death Benefits Allowance (LSDBA). The LSDBA is set at £1,073,100 and covers the total amount of tax-free lump sums, serious ill-health lump sums and lump sum death benefits that can be paid.

Where aggregated lump sum and lump sum death benefit payments from registered GLA schemes and other registered pension arrangements exceed the LSDBA, taxation will apply based on a beneficiary’s marginal tax rate. As it did for the 2023/24 tax year, after the Chancellor first announced the removal of the LTA charge in the March 2023 Budget, for all new benefit crystallisations on or after 6 April 2023.

This means beneficiaries of lump sum death benefits from a registered GLA scheme continue to have a potential tax charge due, where total benefits exceed £1,073,100. However, instead of this being based on the fixed LTA charge rate of 55%, this will now be based on the beneficiary(s) highest marginal tax rate, currently ranging between 19% and 47% depending on location.

For the most part, the abolition of the LTA will not radically change the reporting requirements. The current requirement to notify HMRC when a lump sum death benefit payment being made exceeds 50% of the LTA is replaced with a new reporting requirement to notify HMRC when a lump sum death benefit is paid that exceeds the LSDBA.

After an individual dies in the UK, the legal personal representatives of the deceased will assess all the lump sum payments received following the individual’s death to determine whether the LSDBA is exceeded, and further tax is due. Scheme trustees must inform these LPRs of any lump sum death benefits arising from a registered GLA scheme, together with the amount of LSDBA that is used.

For any scheme that currently has specific reference in its scheme rules and associated documentation to the ‘LTA’, these wordings will need to be reviewed to reflect the abolition of the LTA. For example, schemes set up to pay out 2x, 3x, or 4x salary, as a single lump sum ‘up to LTA’, will now need to say, ‘up to LSDBA’. The benefit promise remains the same, but the wording will need to change.

Many people in the UK will be unaffected by the replacement of the LTA with the LSDBA when it comes to inheriting a lump sum pay-out from a registered GLA scheme. However, if the total lump sum being received from all registered arrangements exceeds the £1,073,100 threshold, the excess will be taxed according to the recipient’s own tax rate. When scheme trustees are making beneficiary decisions, potential tax treatment should be an additional consideration.

Fortunately, most employees who have any of the forms of “protection”, which gave them special terms when the pensions regime went through changes in the past, will normally keep their protection after the abolition of the LTA. This may mean they have a higher personal LSDBA. As is the case currently, individuals will need to seek appropriate tax advice for their individual circumstances.

Similarly, employees who have their GLA cover provided via an excepted GLA scheme will be unaffected by the changes. However, as before, there could still be a potential inheritance tax charge payable under certain circumstances. Employers wishing to implement a new excepted group policy can also continue to do so, subject to their own legal advice.

The Finance Act 2024, will see the LTA abolished from 6 April 2024. There are parts of the legislation that will need changing, as it does not meet the original policy intent. However, as far as we are aware the broad principles we have outlined here will not be affected.

It should also be noted that a general election will take place this year (or very early in 2025). The Labour Party has indicated that it does not support the abolition of the LTA; if they form the next government, they could well look to make further changes.

Now is an ideal time for employers to fully review their scheme design to ensure it continues to meet their needs, as well as ensuring it is documented with the correct terminology, based on the latest legislation.

Until then, our door is always open to employers who might have further questions about GLA changes in progress; please contact us using the form below or reach out to your MMB consultant.