Life cover for lawyers – an asset in the race for talent? 

As the race for talent continues, attracting the best people can be difficult for law firms and inflating salaries isn’t always the answer. Instead, providing for loved ones as part of a broader benefits package could be a tactic worth exploring.

When deciding where to work, top talent has plenty of choice. Today, the pressure is on employers to show their worth.

As UK law firms expand their services, so the demand grows for great people to deliver them.

Add to that the labour shortage caused by the Great Resignation and candidates with something to offer can afford to be picky.

Pay versus package

Sky-high salaries for newly qualified lawyers have hit the headlines, but this isn’t always the solution, especially if comparable pay levels are available across competitors. It’s also an expensive route for employers.

The COVID-19 pandemic caused priorities to shift. Employees now want greater flexibility and a better work/life balance. Many want to know their families or dependants will be looked after should anything happen to them.

Benefits can, therefore, be important as well as pay. And this is where employers with a more rounded approach to remuneration can steal a march over the rest.

Trending away from traditional policies

One trend we’re seeing is around take-up of Excepted Group Life Policies (EGLPs) for employees, rather than more traditional life cover provided through a registered pension scheme.

EGLPs come with tax benefits that make them particularly relevant to a wide spectrum of employees, not just the traditional higher earners. They’ve been popular in the financial services sector for a while and, increasingly, we’re seeing law firms, from the Magic Circle through to mid-tier, looking to EGLPs to enhance their benefits package.

But EGLPs also bring their own complexities, so here’s an overview of what you need to know from a tax perspective.

What is an EGLP?

Available from standard insurance providers, EGLPs provide lump sum death in service benefit payments. Employers purchase these policies and contribute them to a discretionary trust, with a trustee responsible for paying out the proceeds of the policy if the insured employee passes away.

What needs to be taken into account when comparing EGLPs and traditional life assurance arrangements

There are several considerations.

• Firstly, unlike traditional registered life insurance schemes, payments from EGLPs are not subject to the pensions Lifetime Allowance (LTA) – essentially a limit on how much beneficiaries receive without incurring an additional tax charge. It’s currently frozen at £1,073,100 until at least 6 April 2026.
  
  The freezing of the LTA over recent years has increased the risk of lump sum life insurance pay-outs incurring a 55 percent LTA charge, depending on the value of pension savings and death in service benefits.
  
  The latter is typically paid as a lump sum based on a multiple of salary. But given the freeze, especially in the context of rising inflation, a death in service payment of six times a person’s salary could easily exceed this limit. And that has implications for many people beyond the highly paid.
  
  
• EGLPs are a way for firms to provide death in service benefits to employees who have enhanced or fixed LTA protections in place. These would be voided at the point of provision if the individuals were given life cover through a registered scheme, potentially limiting them to the relief available under the standard LTA rules. For people impacted by successive LTA reductions, these protections can be extremely valuable.
  
  
• Policies can also be offered to partners, making them particularly attractive for law firms. 
  
  
• Implementation costs are roughly the same as providing life cover via a registered scheme, so employers are not paying a premium for enhancing their benefits package.

Are there disadvantages?

There are certainly pitfalls to be aware of.

Schemes must meet certain conditions to be classed as an EGLP. For example, the same formula has to be used to calculate benefits for everyone covered by the policy, and employees aged 75 and over are unable to participate.

We’ve also seen examples where a policy meets the conditions but the trust holding it has been registered with HMRC. If this is the case, it’s treated as a registered scheme and is subject to the LTA rules. That cancels out one of the main benefits of an EGLP. Similarly, it is important that the policy is issued and held in the UK, to mitigate the risk of a pay-out being subject to income tax.

There are some other tax considerations, too. For example, where employees ‘flex’ their life cover through salary sacrifice, there can be benefit in kind income tax charges, with an associated National Insurance Contribution cost for firms. This is a manageable risk if the implementation is structured correctly, but employers should be aware of it.

Employers also need to understand the Inheritance Tax (IHT) position – unlike a registered scheme, there is no specific exemption for IHT charges that apply to trusts, so these need to be thought through, and managed.