The Bad news
In April, the HMRC cut the pension Lifetime Allowance (the maximum amount of lump
sum and/or pension that benefits from tax relief) from £1.5m to £1.25m.
As the lump sum benefit provided via a stand-alone Group Life scheme is also classified
by HMRC as an occupational pension scheme for the purposes of tax assessment, the
move may increase the tax burden on families of senior employees with generous group
The Good News
Employees whose potential life policy payout exceeded the new standard Lifetime
Allowance (LTA) of £1.25 million at 5 April 2014 now have three years (from 6 April
2014) to apply to the HMRC for Individual Protection, ring fencing the tax-free status of
the benefits paid out up to the new increased cap of £1.5m and protecting them from
future falls in the LTA.
As this is a personal financial planning issue, the onus is on the individual to make the
application themselves, not their employer.
If a senior director holds a group life policy which pays out £1.4m on his death and he
doesn’t apply to the HMRC to claim the new higher Lifetime Allowance, his family would
have to pay a 55% tax charge on the £150k above the current £1.25m limit, costing them
an unnecessary £82,500.
What you need to do now
Alert senior staff to the change in the LTA and recommend they speak to their financial
adviser about whether they need to apply for Individual Protection. For further
information, visit the relevant HMRC website page.