What employers need to know about paying life assurance benefits

11 Feb 2019 By Adrian Lamb

What should you consider when paying out life assurance benefits – and what are the implications if you get it wrong? Adrian Lamb reports

Most employers provide some level of life assurance benefit for their employees. This is payable in a lump sum if an employee should die, and is usually intended to help provide for the employee's dependants.

In most cases, this benefit is provided through a scheme which is set up under trust and qualifies as a registered scheme under the Finance Act 2004. In recent years, there has been an increase in the number of ‘excepted schemes’ (those set up outside the registered scheme regime), but the fundamental issues and considerations are generally the same.

In many of these schemes, the employer is the trustee and there is almost always a ‘discretionary trust’ in place which sets out the powers (and duties) of the trustee in making the decision on who should receive part or all of the benefit. This is used primarily to avoid inheritance tax.

Unfortunately, there continue to be misunderstandings about who the benefit can and should be paid to. This has resulted in complaints being made to the Pensions Ombudsman, and in a number of cases it has found that at least some of the benefit should have been paid to somebody other than the person (or persons) to whom the benefit had been paid.

Any mistake can be expensive for two reasons. First, the amount of the lump sum payable is often two, three or four times the person's annual pay so is often in excess of £100,000. Second, and more significantly, the insurer underwriting this benefit will only pay out once, therefore if a mistake is made, the employer will have to fund any resulting payments itself.

There are some important dos and don'ts for employers or trustees to follow when deciding to whom the benefit should be paid:

  • Follow the rules. First and foremost, trustees (whether the employer or individuals) can only pay benefits in accordance with the governing provisions of the specific scheme. Make sure you know what the rules specify, but also check what is included in the communication to employees.
  • When a benefit becomes payable, collect information that will enable you to make payments correctly. This will almost certainly mean seeking information from more than one source – work colleagues, HR professionals and close family. 
  • Check the rules to see who could be considered. The rules will normally have wide categories of potential recipients (sometimes including charities, relatives and financial dependants).
  • Now consider who you think you should make a payment to. In some cases, this may be straightforward, for instance if the employee is survived by a spouse, has been married for a long time and has no other financial dependants. However, it is essential to make sure you have information that supports this.
  • In more complicated cases, where it is not clear who to make a payment to, consider seeking professional advice. This could include a scenario where the employee has divorced and is cohabiting with somebody else or has children from more than one relationship.
  • Take steps to encourage employees to keep their ‘expression of wish’ forms up to date. The form will normally only indicate who the employee wished the trustees to consider for receipt of the benefit at the time the form was completed. Remember that the form is not binding on the trustee/employer.

In most cases, the decision will probably be straightforward, but it is important to follow the same process in each case and make the right enquiries to ensure the information you gather is correct and complete.

Adrian Lamb is a legal director in Blake Morgan’s pensions and benefits team

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