Aon plc (NYSE:AON), a leading global professional services firm providing a broad range of risk, retirement and health solutions, has found that just a third of UK employers have taken action to address the impact of lump sum death in service benefits on the Lifetime Allowance, by using Excepted Death in Service cover. Based on a survey of client activity, Aon believe inaction on this issue can have tax implications for beneficiaries who receive lump sum death in service benefits, and can also affect an employee’s retirement planning if an employer inadvertently invalidates their HMRC protection.
While it was historically only considered relevant to higher earners, more employees are now being impacted by the Lifetime Allowance. There are three key reasons for this: increasing pension values, higher levels of lump sum life cover on offer, and the current level of the Lifetime Allowance, which at £1,055,000, is at one of the lowest levels since its introduction in 2006.
In addition, for employers providing Death in Service benefits in an OpRA environment, the Government’s 2017 tax changes which impacted Excepted, but not Registered, life cover, are another complex aspect to consider. Optional Remuneration Arrangement (OpRA) is the new HMRC terminology which effectively replaces ‘Salary Sacrifice’.
Mark Witte, principal at Aon, explains:
“The potential fall-out of employer inaction – or incorrect action – could range from disgruntled employees and beneficiaries, to inadvertent loss of HMRC protection – which could cause significant financial impact at retirement. The concern is that if employers don’t know enough about this subject and don’t engage in the debate around providing lump sum Death in Service cover on an ‘Excepted’ basis, then the impact could be far-reaching.
“Encouragingly, the overall percentage of Aon’s clients taking action and utilising Excepted cover has increased to 33%, up from 24% in 2016. The main increase in activity has occurred in the small company sector (below 100 employees) where 19% have taken action (up from 4% in 2016), with the percentage of large companies (above 100 employees) taking action remaining stable at 45%.”
The research takes into account Aon client activity with the actions of over 1,150 clients included. It also compares findings with market reports on the utilisation of Excepted cover to show wider action and activity amongst Aon’s clients. There has been higher utilisation ratios of Excepted cover1 across Aon’s portfolio (with 33% utilising Excepted cover in 2018 and 24% in 2016) compared with the market in general (with just over 14% utilising Excepted cover in 20162). Aon believes this is because of its technical expertise and the proactive discussions held with clients to support their decision-making, ideally after taking legal or tax advice.
Mark Witte continues:
“Employers frequently ask us what everyone else is doing, but we wouldn’t advocate a single course of action. Indeed there is not a commonly agreed unified approach, which is not helped by the lack of clarity from HMRC on the ‘acceptable’ use of Excepted cover.
“However, our updated research provides valuable insights into the wide range of employer attitudes, how these are changing to meet this complex issue and – importantly – how approaches differ based on the size of employer. Coupled with their own legal and tax advice, this helps employers to reach a decision that works for them.”
Attitudinal insights from the analysis shows:
- For the small sector, where action has been taken, the fully Excepted route remains the most common approach (39%). However, the lower percentage of large employers adopting this approach indicates a continued caution, albeit it has still increased to 19% from 12% in 2016.
- For the large company sector (as in the 2016 survey) more than one criteria is often used when providing Excepted cover. However, this has reduced since 2016, which may be due to a desire to simplify administration and/or communication, or as a direct result of the OpRA tax changes.
- In the large company sector, the popularity of using a threshold approach (salary or sum assured) to determine Excepted provision has also reduced to 35% (from 59% in 2016). Again this may be due to a desire to simplify administration and/or communication, or as a direct result of the OpRA changes. However, where a threshold remains, a wide range of stances still exist.
- The survey also demonstrates that where employers provide Excepted cover in an OpRA environment, less than half of those surveyed made any changes to their flex and/or funding design as a reaction to the HMRC tax changes. However, where changes were made, the most common action was removing the option to flex down employer provided cover (i.e. to remove the potential for a ‘type B’ OpRA tax charge).
Catherine Stait, principal at Aon, adds:
“Many employers have still not made decisions, and those that have are often unsurprisingly trying to simplify stances. Our concern is that many may not have made changes or even considered this topic since 2006, yet so much has changed since then – and that means many more people are now likely to be affected.”
1Excepted Group Life Cover (EGLP) offers tax efficiencies on Death in Service benefits, meaning beneficiaries are not exposed to the 55% tax charge above the LTA.
2Swiss Re’s 2018 Market Watch report.