In 1989 the earnings cap was introduced, which restricted the amount of salary on which tax efficient pension contributions and benefits could be delivered.
The ‘approved’ pension regime could still provide valuable and tax efficient death in service benefits, but within certain limitations:
- A maximum salary of the earnings cap
- A maximum lump sum death in service benefit of four times capped salary
- A maximum dependant’s death in service pension (DDISP) of 4/9ths of capped salary.
Then on 6 April 2006 (known as A Day) came the tax simplification legislation for pension schemes, which swept away the many existing regimes and replaced them with one simple approach, principally consisting of two allowances:
- A tax efficient ‘input’ amount for contributions called the annual allowance, which is set at £40,000 for 2017-18.
- A tax-efficient ‘output’ amount for benefits called the lifetime allowance (LTA), which is set at £1m for 2017-18.
This has raised a number of issues in relation to the provision of group death in service benefits. As a result, unapproved policies have been replaced either by ‘excepted group life’ or by ‘single member relevant life’ policies. There has been a shift away from providing DDISPs and into the provision of additional lump sums, which are tax-free up to the LTA. Some employers have also introduced the option for their staff to decide annually whether to convert some, all or none of their DDISP into a lump sum alternative.
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