Excepted Group Life Schemes: Death in Service for High Earners Outside the Pension Framework

Most UK employer death in service schemes are structured as registered group life schemes — written under the pension trust framework and registered with HMRC. This arrangement delivers tax-efficient death benefits for the majority of employees.

However, for a growing number of high earners — particularly those with significant accumulated pension savings or who make substantial pension contributions — the registered group life framework creates an unwanted interaction with the pension annual allowance and the post-2024 lump sum and death benefit allowance rules. The solution for these individuals is the excepted group life scheme (EGL), a death in service arrangement held outside the pension framework entirely.

Why Registered Group Life Creates a Problem for High Earners

Registered group life schemes pay a lump sum death benefit that, under HMRC rules, is treated as a pension lump sum death benefit paid by the employer's pension scheme. Until 6 April 2024, this payment was generally tested against the pension lifetime allowance (LTA). Since the LTA was abolished on 6 April 2024, the relevant measure is the lump sum and death benefit allowance (LSDBA), set at £1,073,100.

The LSDBA, introduced by the Finance Act 2024 as part of the post-LTA framework, sets a limit on the total tax-free lump sums that can be paid on death from registered pension schemes and registered group life schemes. Above the LSDBA, the excess is subject to income tax in the hands of the recipient.

For a high-earning employee — say, earning £300,000 per year on a 4× scheme, generating a £1,200,000 death benefit — whose combined pension pot and accrued pension rights may already approach or exceed the relevant allowances, the group life benefit could trigger significant tax on the excess.

Note: the post-2024 pension death benefit taxation framework is complex and has been subject to ongoing change. The interaction between the LSDBA, registered group life, and defined benefit pension accrual requires specialist advice specific to individual circumstances. This guide provides a framework rather than definitive tax guidance.

Excepted Group Life: The Outside-the-Pension Solution

An excepted group life (EGL) scheme is a life insurance policy held under a discretionary trust that operates entirely separately from any pension scheme. It is not registered with HMRC as a pension scheme and does not give rise to any pension benefit. As a result, the death benefit does not interact with the pension annual allowance, the LSDBA, or the pension taper provisions.

The death benefit from an EGL scheme is paid by trustees at their discretion — just as with registered group life — typically guided by the employee's expression of wishes. The trust structure keeps the benefit outside the employee's estate for IHT purposes.

Key characteristics of excepted group life:

• Not registered with HMRC under pension legislation
• Trust-based: benefit outside the estate, trustees hold discretion
• No pension allowance interaction — benefit does not count against LSDBA or annual allowance
• Employer contributions (premiums) are deductible as a business expense
• No benefit-in-kind on the employee (provided the premium is not allocated to a specific individual's arrangement and the scheme is genuinely group-based)
• Typically used for: employees with large pension pots, employees who are at or near the LSDBA limit, self-employed directors where a registered pension scheme is inappropriate

The Income Tax Interaction on Death Benefits

For registered group life schemes, the HMRC trust structure means that death benefits are typically treated as discretionary payments by trustees — not as income of the deceased's estate, and not subject to IHT (because of the trust structure). However, under the Autumn Budget 2024 changes, pension pots remaining at death (drawdown funds) are to be brought within the scope of IHT from April 2027. The interaction with registered group life death benefits requires specialist monitoring as legislation develops.

For EGL schemes, the benefit is not a pension benefit and does not attract the same tax rules as pension death benefits. The benefit is paid by the EGL trust to beneficiaries — typically free of income tax, because it is not employment income and does not arise from a registered pension scheme. However, the exact tax treatment depends on the trust structure and the nature of the payment; specialist tax advice should be obtained.

The Trust Structure: Master Trust vs Standalone Trust

Master trust. Most excepted group life policies offered by insurance companies use a master trust arrangement — a single trust deed maintained by the insurer (or a specialist trust company) that covers all participating employers under a common structure. This is the simplest and lowest-cost option for employers. Employees nominate beneficiaries via an expression of wishes form. Trustees of the master trust hold discretion and distribute in line with nominations.

Standalone employer trust. Some larger employers or those with specific governance requirements establish their own EGL trust with their own trustee board. This provides greater control but requires more administration: the trust must be properly constituted, trustees must be appointed and replaced as required, and — importantly — the trust must be registered on the HMRC Trust Registration Service (TRS) if it is an express trust (which most standalone trusts are).

Scheme Administration and Compliance

Excepted group life schemes require careful ongoing administration:

Membership updates. As with registered group life, the insurer must be notified of changes in membership — new joiners, leavers, salary changes — to keep the scheme data current. Inaccurate data creates underwriting and claims risk.

Free cover limit considerations. EGL schemes follow the same free cover limit mechanics as registered group life: benefits below the FCL are insured automatically; above the FCL, individual medical underwriting evidence is required. Because EGL schemes tend to be used for high earners — whose benefits are relatively large — FCL excesses are more common in EGL than in broad-population registered schemes.

Small scheme underwriting. For employers setting up EGL schemes with only a handful of eligible employees (often just the directors of an owner-managed business), insurers may require individual underwriting for all members, regardless of FCL. This is the norm for schemes below 5 or 10 lives.

Expression of wishes. Employees should complete an expression of wishes form for the EGL scheme separately from any registered pension nomination. These are independent documents and affect different benefits.

Trust registration. As noted above, standalone EGL trusts must be registered on the HMRC TRS if they are express trusts. Master trust arrangements provided by insurers handle this registration collectively; employers using master trusts do not typically need to register separately. However, if you are uncertain about registration status, this should be confirmed with the scheme administrator or a specialist adviser.

EGL vs Registered Group Life: Summary Comparison

Feature	Registered Group Life	Excepted Group Life
Pension framework	Inside — pension benefit	Outside — not a pension
LSDBA interaction	Yes — counts against allowance	No — entirely separate
IHT treatment	Outside estate (if discretionary trust)	Outside estate (if trust properly structured)
Trust structure	Master trust or employer trust	Master trust or employer trust
Employer premium deductibility	Yes	Yes
Employee BIK	No	No
Administration	Standard	Slightly more complex
Suitable for	Most employees	High earners near/above pension allowances

When to Choose EGL: Decision Framework

An employer should consider an EGL scheme (either standalone or alongside a registered group life scheme for other employees) where:

• Senior employees have pension pots likely to interact adversely with registered group life death benefits
• The business has directors or executives who have opted out of the employer's registered pension scheme due to allowance concerns
• The owner-managed business structure makes a registered pension scheme inappropriate for some or all participants
• A previous registered group life scheme has been identified as creating a tax problem for specific high-earning employees at the annual review

Many employers operate both a registered group life scheme (for the majority of employees) and an EGL scheme (for a subset of senior employees or directors). The two schemes can coexist without issue.

How Global Investments Can Help

Global Investments advises business owners, directors, and senior executives on protection planning that integrates with their pension and estate planning strategies. The interaction between group life schemes, pension allowances, and IHT is complex and evolves with each Finance Act. Getting the structure right requires specialist co-ordination across protection, pension, and tax planning.

If you are an employer concerned that your current group life arrangements may be creating pension-related tax problems for senior employees, or an individual who has been advised that your existing death in service cover may be taxable, speak with one of our advisers. We can facilitate access to specialists who can assess the position in detail.

This guide is for general educational purposes and does not constitute regulated financial or tax advice. The pension death benefit tax framework has been subject to significant change following the 2024 Autumn Budget, and further changes may occur. Always seek professional advice tailored to your specific employment and pension circumstances before making decisions about group life scheme structure.