Group life assurance: registered vs excepted schemes and lump sum death benefit allowance
Group life assurance remains one of the most cost-effective ways to protect your employees’ families financially. Yet many employers are unaware that the pension tax landscape has shifted, creating an important distinction between ‘registered’ and ‘excepted’ schemes that could affect the tax treatment of death benefits.
What are the benefits of a group life assurance scheme?
To the employer:
- Assists retaining and attracting talent
- Premiums are an allowable business expense
- Can choose different benefit levels for staff categories
- Insurer provides necessary trust and scheme rules
- Relatively cheap premiums
To the employee:
- Gives peace of mind to support dependant’s financially
- Lump sum does not usually form part of estate so can be paid quickly
- Not a benefit in kind
- Usually available without medical underwriting
Registered group life or excepted group life scheme?
A group life scheme is an insurance policy written in trust. There are two ways this trust can be structured. A registered scheme is technically a pension so falls under pension tax rules. The alternative is an excepted scheme which is not registered as a pension.
Why is the trust structure important, and what is the lump sum death benefit allowance?
When the lifetime allowance for pensions was removed, the government introduced a limit on the total amount which could be inherited from pensions without tax. This is called the lump sum death benefit allowance (LSDBA). Currently the LSDBA is £1,073,100 (2025/26) and there are no provisions to increase this threshold. If the total of all pensions on death is above the LSDBA, the beneficiaries will be liable to income tax on the excess. As a registered group life scheme is a pension, a large payment could bring an estate over the allowance. An alternative would be to use an excepted trust, so the full death benefit is provided to the employee’s dependants.
What are the key differences between registered and excepted schemes?
While excepted schemes do not count towards the LSDBA, they do come with certain limitations. For instance, they can only have one level of benefit. Also, there may be a ‘periodic charge’ if there is a value in the trust at the ten-year anniversary, although most trusts are re-written before this. Below is a summary of the key features of each trust:
NB. Some employees may have applied for lifetime allowance (LTA) protection so will have a different LSDBA depending on when this was done.
Which structure is best for you?
The appropriate structure for you will depend on your employees’ personal circumstances and your position as an employer. Many employers are unaware of this issue, so the important thing is to weigh up the pros and cons of each solution.
As a first step, review your current scheme to identify whether it is registered or excepted. Consider your employees’ likely pension wealth and whether the lump sum death benefit allowance threshold could affect their beneficiaries. Whatever structure you choose, document your decision-making process to protect yourself from future disputes, and review your position annually as circumstances and tax rules evolve.
If you would like to discuss your current group life assurance arrangement or need help determining which structure best protects your employees’ interests, our team of employee benefits experts would be pleased to arrange an introductory conversation at a time that suits you.
