Death in Service

Death in service is an occupational benefit offered by employers that pays out a tax-free lump sum to beneficiaries nominated by an employee, if their death occurs while they are working at the company. It isn’t a legal requirement, but offered as a valuable employee perk, helping to attract and retain staff, as it protects loved ones in the event of the employee’s death.

It’s important to understand the difference between life insurance and death in service. Although both pay a lump sum in the event of death, in the case of the latter, the benefit is restricted to a certain amount and is only available if offered by the company and if the employee passes away while on the payroll. The employee doesn’t have to pass away at work or as a result of a work-related accident, they simply need to be on the payroll at the time of their death.

The amount paid to relatives is dependent on the terms of the package and, in most cases, is based on the amount the employee earns. It’s usually a multiple of their salary, generally around three or four times the amount stated in their employment contract. This can be paid as a tax-free lump sum or, more usually, put into a discretionary trust, which then pays out the money to the beneficiaries. As it’s tax free, no inheritance tax is due.

Generally, it’s the trustees – or the employer – who decides where the lump sum will go, taking into account the wishes of the employee. For this reason, it’s a good idea for the employee to write a ‘nomination of benefits’ or ‘expression of wishes’ letter, stating who they would like to receive the money.

Death in service is often linked to company pensions, with employees only eligible if they sign up to the company pension scheme. It is considered to be a good employee perk, allowing the employee to choose their beneficiaries and giving them the peace of mind that their loved ones will receive a tax-free payment, which can be used to supplement any life insurance money.

To find out more about the death in service benefit and whether it is appropriate for your business, please get in touch and we will be pleased to advise and, if suitable, arrange cover for you.

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