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Unapproved Group Life and Dependants' Pension top-up policies.

Unapproved top-up policies were used to provide additional lump sum or dependants' pension in respect of an employee's earnings in excess of the statutory earnings cap. Following A Day the need to establish new Unapproved policies, and continue some existing Unapproved policies, generally ceased.

WARNING: The information contained in this document is based upon Unum's current interpretation of the underlying legislation which may change. We do not accept any responsibility for any loss which may arise based upon reliance on the information enclosed.

The note covers the following:

1. Background
2. Transfer of Unapproved benefits into the Registered Scheme
3. Policy options for providing lump sum benefit in a Non-registered Scheme
4. Transition of Unapproved policies to Non-registered policies
5. Transfer of benefit from an Unapproved top-up policy currently insured with another provider
6. Tax table
7. Transition grid for Unum Unapproved policies at A Day
8. What do you need to do?
9. Unum contact and support

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1. Background.

Lump sum Unapproved policies could either be in the form of Unapproved "Excepted" Group Life policies, that meet the criteria set out in Finance Act 2003, or Unapproved "Non-excepted" policies. Unapproved policies that provided Dependants' pension were always Non-excepted as the statutory criteria forUnapproved "Excepted" Group Life policies prevent them from providing a pension.

We believe most customers will, from A Day, choose to provide the old unapproved benefits within the tax privileged Registered scheme. This is now possible as:

• The statutory earnings cap is removed, and
• A Registered scheme is not limited in the amount of benefit it may provide, although tax-free lump sum payments are limited to the Lifetime Allowance (LTA).

However, some customers may wish to provide some lump sum benefits under a Non-registered scheme. In most cases, this will be to avoid the LifetimeAllowance Charge (LTC) of 55% on the excess over the LTA on the payment of a lump sum benefit above the LTA from a Registered scheme.

This note provides information for advisers to assist in their consideration of how their clients may:

• Transfer Unapproved benefits into the Registered scheme, and
• Select the most appropriate policy option for providing lump sum benefits in a Non-registered scheme.

We have provided a transition grid to assist in this process. This grid has been created based on the assumption that there is no change in the overallbenefit provision.

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2. Transfer of Unapproved benefits into the Registered Scheme.

There are two options which are shown in further detail in the transition grid. They should have been effected on A Day or at the verylatest before any further premium was payable to the Unapproved policy. Failure to act means an Inheritance Tax liability may be generated if a death occurs.

Option 1.

Assignment of the current Unapproved policy.

We have developed a simple approach that avoids having to restructure existing polices and does not trigger a rate re-test. This involves the assignmentof the current Unapproved policy from the trustees of the Unapproved scheme to the trustees of the Registered scheme.

All of the benefits provided by the Unapproved policy must be assigned in total to the Registered scheme. For some members this may result in a LTA chargeon their death if at that time the lump sum benefit payable from the Registered scheme takes their crystallised benefits over the LTA.

To facilitate this assignment we provide the following generic documents:

1. Deed of assignment between the trustees of the current Unapproved scheme and the trustees of the Registered scheme.
2. Rule amendment to remove the statutory earnings cap and provide benefits on full salary.

A two stage process is involved:

Stage 1: The current Unapproved top-up is assigned by the policyholder to the trustees of the Registered scheme thereby moving the status of the policy from Unapproved to Registered. All other terms and conditions of the policy are retained until the expiry of the existing policy guarantee. The premium for the policy will be unaffected, including any additional premium payable in respect of members not accepted on normal rates.

Stage 2: At the next review date the Unapproved policy will terminate and the benefits transferred on "no worse terms" to the main Registered policy.

Option 2.

Terminate an Unapproved policy and insure an equal amount under a Registered policy.

Employers may terminate a current Unapproved policy and insure an equivalent amount under a Registered policy. The lump sum payable under the Registered scheme will result in a LTA change if it takes their crystallised benefits over the LTA. This will require a rate retest.

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3. Policy options for providing lump sum benefit in a Non-registered Scheme.

Option 3 - See transition grid below.

Employer Financed Retirement Benefit Scheme (EFRBS).

Unless a Non-registered policy meets all the criteria for a "Relevant Life Policy" it will become an EFRBS. The tax treatment of EFRBS (see 'Tax Table') means they are unlikely to be popular.

In order not to be an EFRBS, life cover schemes that are not registered will need to provide only "excluded benefits" within the meaning of section 393B(3) of the Income Tax (Earnings and Pensions) Act 2003. Excluded benefits include, amongst other things, benefits under a "Relevant Life Policy" as defined in section 393B(4).

A Relevant Life Policy, in turn, covers an Unapproved "Excepted" Group Life policy, and an individual life policy which fulfils all the criteria for an Unapproved "Excepted" Group Life policy, with two exceptions which are naturally inapplicable to a single life policy.

In order for a Non-registered life cover scheme not to be an EFRBS, any policies it holds under which benefits are provided must be Relevant Life Policies.

"Excepted" Group Life policy.

Originally introduced by the Finance Act 2003, this policy is now defined in section 480 of Income Tax (Trading and Other Income ) Act 2005. The lump sumbenefit provided by this policy does not count towards a member's LTA. This policy has to meet the following criteria:

• (i) There must be a minimum of two members at inception.
• (ii) The policy must provide a capital sum payable on death before age 75. The policy may contain exclusions which apply to all insured individuals e.g. suicide exclusion.
• (iii) The same method for calculation of the capital sum and any limitations e.g. stated fixed benefit or multiple of earnings, must be applied to all lives insured.
• (iv) The policy must not provide a surrender value other than a refund of "unused" premiums.
• (v) Only the benefits set out above may be provided by the policy.
• (vi) 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.
• (vii) No person whose life is insured under the policy may receive any death benefit in respect of another group member.
• (viii) The policy must not be taken out with the main purpose of avoiding payment of tax.

Single member Supplementary Relevant Life policy.

These policies must fulfil the same criteria as an "Excepted" Group Life policy, as set out above, with the exception of (i) and (iii) which are naturallyinapplicable to a single member policy. The lump sum benefit provided by this policy does not count towards a member's LTA.

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4. Transition of Unapproved policies to Non-registered policies.

Many Unapproved policies will meet the criteria for either an "Excepted" Group Life or a single member Supplementary Relevant Life policy.

The following Unapproved polices will have automatically become EFRBS:

• Lump sum policies that cover more than one member with different methods of benefit calculation.
• Dependants' pension policies, as Relevant Life policies must only provide lump sum benefits.

Customers will need to take action to avoid the policies above from being EFRBS.

The options for lump sum benefits would be to move the benefit into the Registered policy with the potential to incur a LTA charge on death or effect a Supplementary Relevant Life policy for each Unapproved policy member.

The benefits provided under an Unapproved Dependants' pension policies should be assigned to a Registered scheme.

Whatever action you wish to take, we will require a letter of instruction to evidence the change from Unapproved status.

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5. Transfer of benefit from an Unapproved top-up policy currently insured with another provider.

There are a number of cases where Unum currently insures the Registered scheme benefits and another provider insures associated Unapproved benefits.Where a customer wishes Unum to consider offering terms to include the Unapproved benefits, a formal policy review will be required.

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6. Tax Table.

The following table summarises the tax position for both Registered and Non-registered policies.

Notes:

• I. Lifetime Allowance (LTA) set at £1.6m (for the 2007/8 tax year) and increases annually.
• II. Some pre 06/04/2006 members may have primary transitional protection and have their own (higher) Personal Lifetime Allowance (PLTA).
• III. Lump sums from all Registered schemes count against the LTA/PLTA. Retirement benefits already received will have used part (or all) ofthe LTA/PLTA.
• IV. The LTA tax charge falls solely on the recipients of the lump sum death benefits. The personal representatives of the member are responsible for ascertaining any charge.
• V. Employer premiums to Defined Benefit Group Life policies do not count towards the Annual Allowance.
• VI. Where the only assets held on trust for the member(s) are life policies, the chances of a charge to IHT actually being triggered are relativelysmall. On an exit (i.e. death) within 10 years of the policy being taken out, the applicable rate for IHT would be calculated based on theinitial value of the policy (nil or close to it) and the value of any added property (premiums paid). Provided this total, when combined withany other chargeable transfers, did not exceed the IHT nil-rate threshold, then the IHT nil-rate band will apply. If death occurs over 10 yearsafter the policy is taken out, the IHT rate will be based on the surrender value of the policy at the most recent 10-year anniversary of thepolicy (again this will be nil or close to it), assuming no other chargeable transfers have been made.

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7. Transition grid for Unum Unapproved Policies at A Day.

This transition grid applies to lump sum policies only.

It is assumed that there is no change to the pre A Day benefit structure - if there is a change, then a policy review will be required.

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8. What do you need to do?

Please use the Unum contact and support available. You should read "The impact of Pensions Simplification on Approved Group Life and Dependants' Pensionpolicies" (UP1087), to find out about the impact on Approved policies. This document is available on our website. Follow the instructions detailed for Approved policies, and the steps below for Unapproved policies.

• Step 1 - Contact your clients. To discuss the alternatives available.
• Step 2 - If you have decided upon the assignment approach, Option 1. You must confirm to us that this is the action you wish to take. You can find the revised documentation you need on our web site.
• Step 3 - For Option 2 a policy review will be required. Use the information above to confirm that this is the action you wish totake. Our Financial Underwriting department will then be dealing with your query.
• Step 4 - For Option 3 a letter of instruction is required. This is needed to confirm and evidence the change from an Unapprovedstatus to a new Non-registered status.
• Step 5 - If you require a completely new scheme design. You can discuss your options with our Sales Consultants located in our RegionalSales Offices. Once you have an agreed scheme design you should then submit a quotation request to your Regional Sales Office using the e-mail information detailed overleaf. We will treat this quote as though it is new business.

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9. Unum contact and support.

Unum web site.

You can access more information regarding Pensions Simplification on the Adviser section of our web site at www.unum.co.uk

Unum Sales Consultants.

Your usual Unum Sales Consultant can discuss with you any changes to scheme design you wish to make. We have almost 40 consultants in the UK who can talk to you about the impact of Pensions Simplification or any of your other requirements regarding Group Risk. Full details of our Regional Sales Offices are shown below.

Regional Sales Offices.

South of England
Unum - Dorking Sales Office
Milton Court, Dorking,
Surrey, RH4 3LZ
TEL: 0845 712 5242
FAX: 0845 408 2631
EMAIL: southern.quotes@unum.co.uk

London
Unum - London Sales Office
Swan House, 37-39 High Holborn,
London, WC1V 6AA
TEL: 020 7841 5900
FAX: 020 7831 8391
EMAIL: london.quotes@unum.co.uk

Midlands
Unum - Birmingham Sales Office
4th Floor, Berwick House, 35 Livery Street,
Birmingham, B3 2PB
TEL: 0845 712 5241
FAX: 0845 408 2635
EMAIL: birmingham.quotes@unum.co.uk

North of England
Unum - Manchester Sales Office
1st Floor, The Observatory, Chapel Walks,
Manchester, M2 1HL
TEL: 0161 834 6770
FAX: 0845 408 2634
EMAIL: manchester.quotes@unum.co.uk

Scotland and Northern Ireland
Unum - Glasgow Sales Office
1st Floor, The Beacon, 176 St. Vincent Street,
Glasgow, G2 5SG
TEL: 0845 712 5243
FAX: 0845 408 2637
EMAIL: glasgow.quotes@unum.co.uk

For more information, call your Sales Consultant on 01306 887766.

Unum Limited is authorised and regulated by the Financial Services Authority. Registered in England 983768.

We monitor telephone conversations and e-mail communications from time to time for the purposes of training and in the interests of continually improving the quality of service we provide.

Registered Office:

Milton Court, Dorking,
Surrey, RH4 3LZ
TEL: 01306 887 766
FAX: 01306 881 394
TXT TEL: 01306 887 784

Copyright ©Unum Limited 2007

UP1088 06/2007

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