That Death in Service benefit you take for granted could trigger a tax charge

Many employers provide valuable staff benefits. Pensions have taken centre stage recently, given the introduction of auto enrolment in 2012, but there are a number of employers who also provide a life cover benefit to their employees called ‘Death in Service’.

Although many are fortunate to receive cover from their employer, death in service should not become a substitute for your own personal protection and life cover, so it’s important to ensure you and your family have the right level of cover arranged separately.

Death in Service is usually provided alongside a pension scheme arrangement, which means that if you die while in employment, a lump sum will be paid to your family. As the cover is linked to the pension scheme, the value of the lump sum paid on death actually counts towards your total pension benefits, which many employees and employers are unaware of.

This has remained the case for a number of years, but has gained importance because in April the Pension Lifetime Allowance reduced again - to £1 million – and this means that there may be a greater number of people unwittingly caught out should they have a high level of earnings and/or substantial accrued pension benefits.

Should the overall value of your pension benefits plus the value of your death in service cover be greater than £1 million, upon death before retirement tax will be due on the excess.

We recently covered the pension lifetime allowance in our article: transitional protections explained so it is important to be aware of the potential impact that your death in service cover may have.

It is possible that death in service cover is not provided through a pension scheme; instead being set up via a group life assurance arrangement and if this is the case, then you won’t be caught out by the Lifetime Allowance limits.

If you are in doubt, or believe you could be affected, it may be beneficial to review your arrangements and check with your employer in order to establish exactly what benefits are in place, or if changes can be made.

Should you require any advice on this matter, please contact one of our Financial Planning Consultants at any of our office locations across the North of England and Scotland on 0808 144 5575 or email help@armstrongwatson.co.uk.