Many UK employers provide a lump sum death in service (DIS) benefit as part of their remuneration package. In order for such a benefit to be paid free of inheritance tax, it is typically paid through a discretionary trust structure with a trust deed and rules required in addition to the insurance policy. While some employers continue to provide DIS benefits through their occupational pension schemes (defined benefit (DB) or defined contribution (DC)), regulatory issues mean that most have established standalone trusts, known as group life assurance schemes or group life trusts.
As discussed in more detail below, group life trusts can be either HMRC-registered or ‘excepted’ and each option comes with its own legal, tax, and regulatory issues. This article sets out five top tips for UK employers operating group life trusts, whether registered or excepted.
1. Keep your group life documentation handy and up-to-date
The importance of the trust documentation setting up these benefits can be an issue. Missing trust deeds are a common occurrence and can cause difficulties when a DIS benefit becomes due and decisions have to be taken about the recipient of the money. We strongly recommend all employers check they have a copy of the trust deed for their group life trust and put in place a replacement if it is missing.
As a general rule, group life trust deeds that are more than 10-15 years old are unlikely to remain fit for purpose, given recent tax and regulatory changes. We recommend updating older trust deed documentation, with input from a legal adviser. This does not need to be a complex or costly process and it will ease the future operation and administration of the group life trust.
2. Keep track of your employers
Most group life trusts provide that each group company or other separate employer within a group should have entered into a formal deed before their employees can be provided with DIS benefits under the trust. Employing entities tend to evolve over time. We recommend carrying out regular checks, particularly following any corporate restructuring, to ensure that all relevant employers are included in the trust, and to put in place any missing documentation.
3. Have a process for taking decisions on payment of benefits
In the event of the death of an employee, the decision as to the recipient of the DIS benefit will fall to the trustee of the group life trust. The trustee must take that decision in accordance with the provisions of the trust deed and overriding principles of trust law. We recommend having a process in place to gather evidence and take decisions on the recipient of benefits, take legal advice and carefully document the decisions made.
Having an up-to-date expression of wishes form can make the decision-making process more straightforward. We recommend that employers remind employees regularly to update their expression of wishes forms and that these are collated and kept securely.
4. Make sure your insurance policy is comprehensive
One of the greatest risks associated with operating a group life trust is a benefit becoming due that is not covered by the group life insurance policy. Employers should have a clear process in place to ensure that all employees eligible for lump sum DIS benefits under their employment contracts are in fact covered by the insurance policy(ies) in place and for the appropriate level of cover. Issues can arise, in particular with older employees and high earners, who may benefit from additional tax protections.
Traditionally, group life trusts were drafted to include details of the benefits and eligibility criteria. This is no longer the preferred approach (modern trust deeds simply refer back to the relevant insurance policy). Older trust deeds can, however, cause issues where they have fallen out of step with the insurance cover that is in place and provide for a benefit that is not covered by the current insurance policy. This can lead to financial exposure for employers. Updating or replacing older trust deeds mitigates this risk.
5. Make sure your trust meets the relevant regulatory requirements
It is worth checking that any ‘registered’ group life trust has actually been registered with HMRC and that you have received a Pension Scheme Tax Reference (PSTR) number from HMRC.
Employers are increasingly using ‘excepted’ group life trusts as an alternative way to provide DIS benefits for some or all of their employees. These sit outside the current pensions tax regime and so any lump sum paid will not generally count towards an employee’s pensions tax lifetime allowance. Care must be taken in both the drafting of the trust deed and the operation of the trust to ensure that the specific requirements and restrictions associated with excepted group life policies and trusts are complied with. Specific legal advice is recommended.
Our pensions team has extensive experience advising employers on the establishment and operation of both registered and excepted group life trusts. For help with a group life trust, please contact Amie Bain or your usual Shepherd and Wedderburn pensions team contact.