Summary on the impact of changing LTA rules on Unum Group Life

The below summary is based on our understanding of the current guidance on the Finance (No. 2) Bill, which is continually developing, and we will continue to update the summary if guidance changes. Unum is unable to give advice and recommends employers obtain advice from their financial intermediary in relation to 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. 
• LTA protections were introduced as the LTA was reduced. These protect the existing pension savings of individuals, allowing them to hold more than the standard LTA in their pension without incurring a tax charge. Therefore not all registered pension scheme members have the standard LTA.
• The majority of group life cover is provided by registered pension schemes.
• Death benefits payable from registered pension schemes count towards an individual’s LTA.
• As such, under a registered pension scheme, if a deceased employee’s death benefit plus any pension savings exceeds the LTA, beneficiaries could be required to pay a tax charge. This is tested across all the registered pension schemes an employee might be a member of when they die.

1. What has changed with the pension LTA?

• The Chancellor’s Spring 2023 Budget announced a scrapping of the LTA on registered pension schemes. The LTA charge is to be removed first, followed by the abolishment of the LTA itself.
• Since our initial technical briefing published March 27th, more detail is now available on how the abolishment of the LTA charge will work in practice. 
• Subject to the passing of the legislation, from the start of the 2023/24 tax year (April 6th 2023), the LTA charge on benefits exceeding the LTA will be removed.
• It will be replaced by an income tax charge at the recipient’s marginal tax rate on benefit paid in excess of the LTA i.e. the benefit will be treated as pension income.
• HMRC has confirmed an amendment to its guidance via its LTA Working Group that schemes may continue to use the current process for taxation of lump sum death benefits. Based on information provided by legal personal representatives, HMRC will then raise marginal rate taxation (as opposed to an LTA charge) on the applicable portion of these payments.
• In a future Finance Bill, the LTA will be abolished — likely from the 2024/25 tax year (April 6th 2024 onwards). At this stage, it is not known how this will be abolished and what may be put in its place.

2. Tax-free cash available from pensions

• ‘Tax-free cash’ is the amount an individual can take as a lump sum when they take benefits from their pension. It’s officially known as the pension commencement lump sum (PCLS).
• The maximum PCLS permitted will be frozen at the current level of £268,275 for those without LTA protections.
• HMRC’s Pension Tax Limits Policy paper advises that individuals who already have a protected right to take a higher PCLS will continue to be able to do so and will no longer be required to comply with protection conditions.

3. How does the LTA impact Group Life Insurance?

• The introduction of the LTA and its subsequent reduction to £1,073,100 in 2022/23 meant, as referred to above, under a registered pension scheme where a deceased employee’s death benefit plus any pension savings exceeded the LTA, beneficiaries could be required to pay a tax charge.
• Based on the HMRC guidance published March 27th; with benefits in excess of the LTA now being subject to income tax at the recipient’s marginal tax rate, and the uncertainty of what will come with the abolishment of the LTA, it is no longer clear how this will impact the group life market. 
• HMRC’s guidance includes reference to an LTA Working Group being set up to work closely with the industry as they continue to work through the detail of the full abolition of the LTA.

4. How will this impact Unum’s Group Life Insurance?

• We may not see any immediate change as employers, financial intermediaries, trustees and pension scheme administrators grapple with the detail.
• It is for employers, with appropriate advice from their financial intermediary, to take any action in respect of their current Group Life arrangements. Unum cannot provide advice on this.
• The operation of Unum EGLPs and Unum RGLPs remain unchanged. Unum will continue to pay benefits in accordance with the policy terms to the trustees of the discretionary trusts holding our policies.
• These trustees need to be aware of the removal of the LTA charge at the start of the 2023/24 tax year (April 6th 2023), and that HMRC will approach affected beneficiaries following the end of the tax year in line with the existing process but with a marginal rate charge instead of the LTA charge.

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

• 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 is straightforward to join, and details can be found on our website.
• We have produced a high level summary of the LTA changes here.
• Unum cannot give advice on whether an RGLP or EGLP is more suitable for any given customer. That is up to the employer to decide with their financial intermediary.

6. What happens next?

• HMRC will continue to provide further information in LTA specific Pension Scheme Newsletters. We will continue to engage with the industry and HMRC for the development of a longer-term position for the full abolition of the LTA from April 6th 2024.