The number of excepted group life schemes has risen sharply throughout 2014. Omnilife's Barry Waring explains the dramatic increase
2014 has been a year of buzzwords - auto-enrolment, enhanced protection, fixed protection. It's been a busy 12 months.
At Omnilife, we've been working hard to see what we can do to help advisers steer their clients through the difficult task of structuring effective group risk benefits.
Thanks in no small part to auto-enrolment, but also to the work of GRiD in raising the profile of group risk products, I have noticed a large increase in the number of group life quotation requests. Notably, not all these are conventional in structure. This shows that advisers continue to try and tailor benefits to suit the varying requirements of their clients.
One thing that will stick in my mind from 2014 is the sharp increase in the number of excepted group life schemes. This has, not surprisingly, coincided with the reduction of the lifetime allowance to £1.25m from 6 April 2014, the increased numbers of employees who have applied for fixed or enhanced protection, and the increased difficulties and costs faced in insuring spouses' death-in-service pensions.
Omnilife's in-force excepted book has increased fourfold in the past year and I expect this is a trend mirrored by other insurers. Swiss Re's Group Watch Report for 2014 noted that at the end of 2013, there were a total of 40,813 registered group life schemes, compared with a total of 2877 excepted group life schemes. It will be interesting to see the final numbers at the end of 2014, but I would suspect that there would be a large change noted in the excepted figures.
Why the sudden increase?
Spouses' and dependants' death-in-service pensions are one factor. Some of the advisers I deal with are using excepted schemes to assist in replacing dependants' schemes with an increased lump sum.
Many employers have noticed a sharp increase in premiums, which is largely driven by less favourable annuity rates coupled with a decreasing appetite in the market to write these lines of business. While the higher multiples could be written under a standard registered scheme, this could cause issues with lifetime allowance and also fixed/enhanced protection.
Advisers are also using excepted schemes as a way of mitigating exposure to the lifetime allowance, which was reduced to £1.25m in April this year. This chiefly applies to high earners or those on large lump-sum benefits.
Given that a registered scheme is treated by HMRC as a pension scheme, benefits paid in the event of a member's death are treated as pension payments and aggregated with the pension fund for testing against the lifetime allowance. For some members, the amount of life cover paid alone could utilise or even exceed the lifetime allowance.
Inception of an excepted policy on this basis raises the question of whether the main purpose of the policy is being set up to avoid tax. This is a well-debated point and there are many polarised legal opinions on the issue, so I will not attempt to give an opinion on the matter, and furthermore would urge you to seek legal advice and tax advice when dealing with it. These are not small pots of money to make errors on.
Finally, some are using excepted arrangements to accommodate potential scheme members who already have fixed or enhanced protection but who could lose this protection if they became members of a registered group life scheme.
This could have a significant impact on a company if they were recruiting a senior individual who had fixed or enhanced protection - because if they only offered registered group life, the potential employee would not be able to avail of this cover and still retain their protection. Ultimately this could be a deal-breaker in recruitment, and companies are understandably keen to plug this gap.
It is acknowledged in the industry that guidance regarding the use of excepted schemes is vague, and interpretations differ from adviser to adviser on the most effective and compliant way of implementing these types of schemes. That said, there are some very clear rules published by HMRC, which are as follows:
- There must be at least two people included in the policy
- The policy must only provide a capital sum payable on death before age 75
- The same method for calculation of the capital sum and any limitation, such as stated fixed benefit or multiple of earnings, must be applied to all lives insured
- The policy must not provide a surrender value other than a refund of ‘unused' premiums
- Only the benefits set out above may be provided by the policy
- Benefits payable under the policy must be paid to either an individual entitled to them (or a charity) or a trustee for payment to individuals
- No person whose life is insured under the policy may receive any death benefit in respect of another group member purely on the basis that they are one of the insured persons under the policy
- The policy is not taken out with the main purpose of avoiding the payment of tax
The last bullet point is the subject of much debate, and interpretation of this seems to drive how an adviser will recommend that an excepted policy is structured. As previously stated, it is very important the consequences are fully understood, with legal and tax advice being highly recommended.
Exit charges
One other issue that needs to be considered is the potential for periodic and exit charges on the excepted trust. It is worth having a read of the HMRC literature in full in order to fully understand when this would become apparent.
Most excepted arrangements are run alongside a registered group life scheme so that they can benefit from the same unit rate and free cover levels. This means members transferring across to the new scheme to suffer no disadvantage in terms of medical underwriting. However, a separate trust (and trustee bank account) is required.
This being said, it could well be worth having the conversation to see if it is possible to set up the scheme standalone. Some insurers may be able to do so, albeit the membership may mean the free cover limits are lower.
The issue of tax relief on premiums is clear for registered schemes but it is not quite so obvious for excepted schemes, and the consent of the local tax inspector must be obtained. Omnilife no longer expects group life solutions to be ‘off the shelf', and we are ready to help meet the requirements of advisers seeking a flexible and innovative approach to meet their individual client requirements.
We expect the conversation and debate around excepted schemes to continue for some time yet, and solutions will undoubtedly continue to need to be reviewed as legislation becomes more certain and we understand exactly what the HMRC deems as the purpose of these schemes. l
Barry Waring is group risk sales manager at Omnilife
