We recently highlighted an issue relating to the potential loss
of fixed protection under life cover arrangements. A sudden change
of heart by HMRC means that the concerns this had raised for
members, trustees and scheme employers have largely been
allayed.
A reminder
Our
Law-Now last week flagged HMRC's treatment of
arrangements to pay lump sums on death, capped by reference to
insurance policy proceeds, as "hybrid arrangements". The
impact of that interpretation, under the fixed protection
legislation, was that if an individual who had elected for fixed
protection was a member of such an arrangement, he would lose that
protection at the time the next insurance premium under the policy
was paid on or after 6 April 2012.
HMRC's revised reasoning
HMRC has now issued a statement which clarifies its analysis. In
particular, the statement acknowledges that even where there are
insurance restrictions in place which could reduce the total amount
paid, this will not threaten fixed protection where the benefit
after it has been so reduced can itself be expressed as a defined
benefits lump sum death benefit, for example where:
it represents a percentage of the lump sum that would otherwise
have been provided;
it is paid on a pro rata basis;
it is expressed as a lower amount;
the maximum amount paid under the policy is capped.
In our view, this wide statement applies to the vast majority of
cases where a death benefit is limited or reduced by reference to
the underlying insurance policy. The welcome result is that in
those cases HMRC are comfortable that the legislation does not mean
that fixed protection would be lost.
Members who have already ceased life cover
Helpfully, HMRC has also acknowledged the position of members
who had already ceased life cover, due to the risk that continued
payment of premiums on or after 6 April would lead to fixed
protection being lost. HMRC will not regard the re-instatement of
such cover as being a "new arrangement" (which, under the
legislation, would itself lead to loss of fixed protection) so long
as the cover is re-instated as soon as possible, and on a
non-increased basis.
Conclusion
A week can be a long time in pensions, and HMRC's change of
heart will come as a relief to the many schemes whose rules
restrict the level of life cover payable to an amount payable by
the insurer. However, should you have any queries, please speak
with your usual contact at CMS Cameron McKenna.
This article was written for Law-Now, CMS Cameron
McKenna's free online information service. To register for
Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance
only. The information and opinions expressed in all Law-Now
articles are not necessarily comprehensive and do not purport to
give professional or legal advice. All Law-Now information relates
to circumstances prevailing at the date of its original publication
and may not have been updated to reflect subsequent
developments.
The original publication date for this article was
30/03/2012.
Specific Questions relating to this article should be addressed directly to the author.
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