Group Life Assurance ticks all the boxes for an ideal employee benefit, but many employers find it too complicated according to a leading industry body. Confusion over the best way to administer the benefit means many companies either don’t make the most of it or are deterred from offering it at all.
That’s the view of Group Risk Development (GRiD), which represents providers in the group risk protection sector. It says employers are often uncertain how to administer the benefit without undermining their good intentions with tax complications.
The concept of group life assurance is certainly attractive for employer and employee alike. It’s one of those benefits that brings peace of mind, but could seem like an unaffordable luxury for individuals. This means the better rates achievable through an employer-based group scheme can make a real difference in take-up.
Group schemes often cover employees without examining their medical history and potentially excluding people with pre-existing conditions. This means cover becomes available to employees who can’t access an individual policy.
However, GRiD recently warned that simplification of pension tax rules has had an unintended effect that can make group life assurance more complicated. That’s because such schemes are normally set up under a discretionary trust. The idea is to make sure the life assurance is treated completely separately to the employee’s pension arrangements when it comes to tax treatment.
The problem is that the discretionary trusts may have entry charges, exit charges and ongoing ‘periodic’ charges. They can also cause headaches for executors as the inheritance tax system doesn’t offer an easy and obvious way to report the life assurance benefits paid out under such a set-up.
Another area of confusion is that current tax law means that all members of a group life assurance policy set up in this way must have their benefits calculated in the same way. That’s not always the best set-up for every individual.
In the long run, GRiD wants changes to tax law. This would include:
- exempting such set-ups from some charges;
- changing the rules on calculating benefits; and
- making it clearer and simpler to report the benefits for inheritance tax purposes.
It says this would help tackle the problem that the administration of such set-ups costs employers an estimated total of £1.75 million a year. This stands out as particularly onerous given the government only collects around £1 million a year in tax from schemes set up in this way.
In the short run, it’s a clear sign that employers can benefit from expert advice on the best way to offer group life assurance. This can include advice on how to source providers and how to set up a scheme in a way that balances complexity, cost and flexibility for employer and employee alike.
Using an independent advisor that deals with a range of benefits can also mean getting credible advice on whether group life assurance is indeed the best way to meet an employer’s needs and aims, or if another employee benefit may be more suitable.