Summary of how changing Lifetime Allowance rules will impact Unum Group Life

The below summary is based on our understanding of the Finance Act 2024 which received Royal Assent on 22 February 2024 (the wording of the Act is available here). Unum cannot give advice and recommends employers get advice from their financial intermediary regarding the changing rules. 

Background

• The pension lifetime allowance (LTA) was introduced in April 2006. It’s a lifetime cap on the amount of pension savings an individual can build in their pension before being subject to a tax charge.
• The LTA peaked at £1.8 million in 2010/11, was held there in 2011/12 and then steadily decreased. A series of small, incremental increases put it at £1,073,100 as of the 2022/23 tax year. 
• The Government introduced LTA protections as the LTA was reduced. These protect an individual’s existing pension savings so they could hold more than the standard LTA in their pension without incurring a tax charge. As a result, not all registered pension scheme members have the ‘standard’ LTA.
• Most Group Life Insurance is provided via registered pension schemes. However, death benefits payable from registered pension schemes count towards an individual’s LTA.
• As such, under registered pension schemes, if a deceased employee’s death benefit plus any pension savings exceeds the LTA, beneficiaries could face a tax charge. This LTA test applied to all registered pension schemes that an employee was a member of when they died.

1. What has changed with the pension LTA?

• The Spring 2023 Budget announced that the LTA on registered pension schemes would be scrapped. The Government removed the LTA charge for any benefit crystallisation event occurring on or after 6 April 2023.
• From 6 April 2023, the Government replaced the LTA charge with an income tax charge at the recipient’s marginal tax rate on benefits paid exceeding the LTA. In effect, this treats benefits as pension income.
• Schemes have continued to use the current process for taxing lump sum death benefits. Based on information from legal personal representatives, HMRC raises marginal rate taxation (as opposed to an LTA charge) on the applicable portion of these payments.
• From 6 April 2024, the Government has abolished the LTA itself through the Finance Act 2024. The legislation replaces the LTA with new limits on lump sum payments. 
• Lump sum death benefits will be assessed against the new Lump Sum and Death Benefit Allowance ‘LSDBA’. The value of the LSDBA will be £1,073,100 (the current ‘standard’ LTA). There is no provision in the current legislation for this allowance to increase. 
• For individuals who applied for LTA protection before 15 March 2023, LTA protections are no longer affected by joining a new registered pension scheme. This is not the case for those applying for Fixed Protection 2016 after 15 March 2023 where restrictions still apply. Individuals can still apply for fixed or Individual Protection 2016 until 5 April 2025. The value of any pension will not now be taken into any account — only lump sums and lump sum death benefits.

2. How does the LTA impact Group Life Insurance?

• As summarised above, the LTA’s introduction and subsequent reduction to £1,073,100 in 2022/23 meant that, under a registered pension scheme where a deceased employee’s death benefit plus any pension savings exceeded the LTA, beneficiaries could face a tax charge.
• Lowering the tax charge to be based on a beneficiary’s marginal rate may make Registered Group Life policies (RGLPs) more attractive for higher earners, especially as joining new arrangements no longer impacts some LTA protections.
• If the LSDBA doesn’t increase in future years, Excepted Group Life Policies (EGLPs) may become more popular again — even keeping in mind the more complex periodic and exit charges that can apply.

3. How will this impact Unum's Group Life Insurance?

• Employers, with appropriate advice from their financial intermediary, should take any action necessary regarding their current Group Life arrangements. Unum cannot provide advice on this.
• Unum’s EGLPs and Unum RGLPs remain unchanged in terms of operation. Unum will continue to pay benefits in accordance with the policy terms to the trustees of the discretionary trusts holding our policies.
• These trustees must be aware of the abolishment of the LTA and its replacement at the start of the 2024/2025 tax year (6 April 2024). HMRC will approach affected beneficiaries following the end of the tax year in line with the existing process, but with benefits tested against the LSDBA and a marginal rate charge instead of the LTA charge.
• We will replace references to LTA with LSDBA in relevant documentation. 

4. How will Unum make things easier for our customers?

• We’ve produced this high-level summary of the LTA changes here. 
• Whatever employers want to do in respect of their cover, now or in the future, we aim to make this as simple as possible.
• Should employers want to utilise our Master Trusts, it’s straightforward to join. Details are available here.
• Unum cannot give advice on whether an RGLP or EGLP is more suitable for any given customer. Employers must decide this with their financial intermediary.

5. What happens next?

• The Finance Bill received Royal Assent on 22 February 2024 and takes effect from 6 April 2024.
• On 14 March 2024, the government laid The Pensions (Abolition of Lifetime Allowance Charge etc) Regulations 2024. These regulations will come into force on 6 April 2024. These include an override to pension scheme rules; where scheme rules limit benefits based on the LTA, a transitional period running to 5 April 2029 means the limit does not fall away on 6 April 2024.
• We’ll update this guidance if anything changes.