By Bethany Devin, Principal Consultant
Much of the discussion around the 2027 reforms has focused on inheritance tax. However, employers may also need to consider the interaction between group life assurance, pension wealth, the Lump Sum and Death Benefit Allowance (LSDBA), and governance responsibilities when assessing whether existing arrangements remain fit for purpose.
In this article, we explore the key considerations and questions employers should be asking.
Why employers should look beyond inheritance tax
The Government’s inheritance tax (IHT) reforms due from 6 April 2027 have prompted employers, trustees and advisers to review death-in-service and group life assurance arrangements.
While the Government has confirmed that death-in-service benefits paid through registered group life schemes will remain outside the 2027 inheritance tax reforms, that does not mean all tax and governance considerations disappear.
For some employers, the interaction between life assurance benefits, pension wealth and the LSDBA could still create unintended consequences for higher earners and senior employees. At the same time, organisations must continue to manage trustee responsibilities and governance requirements.
The key question is no longer whether inheritance tax applies. It’s whether your current group life assurance structure remains the most effective option for your workforce.
Most employers provide death-in-service cover through either a Registered Group Life Scheme (RGLS) or an Excepted Group Life Policy (EGLP). Registered schemes fall within pension tax rules, while excepted policies sit outside the registered pension framework and can offer additional planning flexibility.
The 2027 inheritance tax changes
The Government originally proposed bringing most unused pension funds and death benefits into the scope of inheritance tax. Following consultation, it confirmed that death-in-service benefits paid through registered group life schemes will remain outside these new IHT rules.
This clarification provides welcome certainty for employers that use registered group life arrangements and removes what had been a significant area of concern.
Why the LSDBA still matters after the 2027 inheritance tax changes
Whilst lump sum payments from a registered group life scheme will not be subject to inheritance tax, they will still be subject to the Lump Sum and Death Benefit Allowance (LSDBA), currently £1,073,100.
Certain pension-related death benefits are tested against this allowance, and income tax charges may arise where benefits exceed the available limit.
Which employees are most likely to be affected?
The LSDBA is particularly relevant for:
- Senior executives
- Higher earners
- Employees with substantial pension savings
- Employees receiving high multiples of salary as life cover
- Those who have purchased additional cover via flexible benefits
- Individuals with pension protections
- Employees with wider estate-planning considerations
For employers with a significant population of higher earners, understanding the potential impact is becoming increasingly important when reviewing both benefits strategy and longer-term reward planning.
Could an excepted group life policy be right for your workforce?
Because an Excepted Group Life Policy sits outside the registered pension regime, it does not use any of an employee’s LSDBA. This allows valuable life cover to be provided without affecting pension death benefit allowances.
“The headlines around the 2027 reforms have focused on inheritance tax. Employers should pay equal attention to how life assurance benefits interact with pension wealth and the LSDBA. For higher earners in particular, those considerations may ultimately have a greater impact than the inheritance tax changes themselves.”
Bethany Devin, Principal Consultant
Why more employers may consider excepted group life arrangements
As pension wealth becomes an increasingly important part of estate planning, advisers may need to consider both inheritance tax exposure and LSDBA limits.
This could lead to greater interest in excepted arrangements for some employers and employee groups.
What do the changes mean for trustee reporting and governance?
Whilst it is welcome relief that registered group life arrangements will sit outside of 2027 inheritance tax reforms, it is clear that this does not remove all practical involvement for employers.
HMRC had been considering changes to the way in which death benefits under pension and group life arrangements would be reported and only recently clarified that employers and trustees would not be brought into wider reporting obligations.
Employers and trustees will, however, remain responsible for providing timely details to an employee’s Personal Representatives.
This means governance and administration remain important considerations when reviewing existing arrangements.
As a result, employers and trustees should consider whether moving to a master trust structure could help alleviate individual trustee reporting obligations and reduce ongoing governance requirements.
Could a master trust reduce governance and compliance burdens?
A master trust can significantly reduce the governance and compliance burden associated with a Group Life Assurance arrangement because the third-party trustee assumes responsibility for many of the trustee duties that would otherwise fall on employer-appointed trustees.
If HMRC proceeds with proposals to require reporting of all death benefit claims, the master trustee would take on the increased administrative workload and compliance risk, rather than the employer’s own trustees.
For organisations looking to simplify governance and reduce risk, a master trust may offer a more efficient long-term framework.
What should employers do now?
Rather than focusing solely on inheritance tax, employers should review protection arrangements alongside pension wealth and broader estate-planning objectives.
The most suitable structure will depend on the workforce profile and the size of potential benefits.
Key questions include:
- Are current arrangements still appropriate for your workforce?
- Could the LSDBA affect higher earners or senior employees?
- Would an excepted arrangement provide greater flexibility for certain groups?
- Is your current trustee structure creating unnecessary governance obligations?
- Would a master trust model improve efficiency and reduce risk?
Employers should review existing arrangements to ensure they remain suitable, particularly for higher earners and individuals with significant pension wealth.
Final thoughts
Emerging legislative and regulatory developments can have important implications for employers. An experienced employee benefits consultant can help organisations understand the practical impact of changes as they arise and provide guidance on any actions that may be required.
Given the ongoing evolution of trustee and reporting requirements, now is an opportune time to review your current arrangements to ensure they remain structured in the most efficient way and are resilient to future regulatory changes.
Future-proof your group life assurance strategy
Ensure your arrangements remain effective for your workforce and resilient to future regulatory change.
