Putting flesh on the bones of the new NHS life assurance scheme

At the heart of this issue is the fact that a sizeable number of individuals in NHS employment have opted out of the NHS Pension Scheme for tax charge or affordability reasons and hence will not be eligible for full death-in-service benefits.

Others without two years’ qualifying service, and those who have never joined the pension scheme at all, will also receive reduced benefits, if any.

Amending regulations so that no bereaved family of an NHS hero faces an IHT bill on their survivor benefits feels like a minimum concession

Any step to ensure the financial security of bereaved families is welcome. But criticisms have been raised that the £60,000 flat payments that apply in England are insufficient and do not level the playing field between the entitlements of active and deferred NHSPS members.

A similar scheme introduced in Scotland, on the other hand, broadly does just that. In order to understand the relative merits of these schemes, it is necessary to look at benefits available under the NHSPS and the new schemes in more detail.

Eligibility

The new scheme covers both frontline NHS staff and social care workers in England. It provides a minimum ‘safety net’ of cover for families of frontline staff who either do not have access to the NHSPS, or who never joined it. It will be paid in addition to any NHSPS death benefits due. 

The Scottish scheme, which “tops up” NHSPS benefits so that all eligible individuals receive payouts equivalent to full death-in-service benefits, is broadly restricted to those who have access to the NHSPS. However, Scottish ministers can designate others as eligible. This means there is less clarity over the scope of frontline workers covered by the new scheme.

NHSPS lump sum death benefit

In both countries, the new life assurance scheme is a welcome safety net for NHS employees who have never joined the pension scheme, ending the system where access to a lump sum death benefit was linked to NHSPS membership.    

In order to form a view on whether the English scheme will serve bereaved families well and fairly, we need to take a look at how the £60,000 payments will interact with NHSPS rules.

In this context, it is worth noting that the value of this payment reduces to between 2.025 and three times accrued pension on death in deferment, from broadly two times pay for death in active membership. This can impact those with short service and higher pay particularly severely.

Taking an example of two clinicians in England, both with four years’ service under the career average section of NHSPS:

The lump sum entitlement due to Clinician 1’s family is £91,040 lower if they die in deferment rather than as an active member. This difference is greater than the £60,000 payment under the life assurance scheme, so the family of a deferred member would have fared better if the clinician had simply been treated as an active member.

Conversely, the lump sum entitlement due to Clinician 2’s family is £44,990 lower if they die in deferment rather than as an active member. So this individual does better under the new life assurance scheme than simply being treated as an active member.

Therefore the English scheme will not be universally worse for families than simply treating all eligible deceased frontline workers as if active members – it depends on individual circumstances.  

The overall position in England also depends on the continuing pension paid to surviving partners and eligible children, which can also represent a poorer deal where the member is deferred at date of death.

The English scheme makes no additional payments to address any such pension shortfall. However, any such shortfall is made good under the Scottish scheme.

Tax status 

The English scheme’s £60,000 lump sum payments are payable to the estate, so inheritance tax may be due where the value of the estate falls outside the nil-rate band.

It seems probable that the families of some clinicians who have died from coronavirus will be caught by this. In addition, where the individual dies intestate, it may take a considerable period of time for the payment to reach beneficiaries and leaves the position for cohabitees uncertain.

Under the Scottish scheme, regulations appear to allow Scottish ministers the discretion needed to ensure that the new lump sum payments are IHT-free. As the NHSPS does not otherwise exercise discretion over distribution of death benefits, some perverse IHT inequities could arise as a result.

Leaving aside the new life assurance schemes and the imperative created by the number of Covid-19-related deaths, it seems right that families of all public sector workers should receive pension lump sum death benefits IHT-free. Most public sector schemes exercise the discretion necessary to ensure this is the case. But this discretion does not apply under the NHSPS, leaving some families with potentially significant IHT bills.

I urge the UK and Scottish governments to amend scheme regulations to ensure this inequity is remedied with retrospective effect to the start of the pandemic.

There is currently overwhelming public support for our healthcare workers. Many would agree that those who lose their lives in support of us all should be treated no differently from members of the uniformed services who die as a result of an injury sustained in the line of duty. In such cases, the entire estate normally becomes exempt from IHT.

By comparison, amending regulations so that no bereaved family of an NHS hero faces an IHT bill on their survivor benefits feels like a minimum concession.

Moira Warner is senior intermediary development and technical manager at Royal London