Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. You should always seek professional advice from an appropriately qualified adviser.
All contents are based on our understanding of current legislation, which is subject to change, any information provided here is only correct at the time of posting.
Ask most employed people whether they have life cover and a good number will say yes, they get four times salary through work. It is a fair answer as far as it goes. Death in service is a genuinely valuable benefit, it costs the employee nothing, and for a lot of households it is the only protection in place. The trouble starts when it is treated as the whole answer rather than one part of it.
Death in service is a lump sum paid by an employer's scheme or a group life policy if an employee dies while still employed. Multiples commonly run at two to four times annual salary, though they vary a lot. It usually pays through a trust, which means the money reaches the family quickly, without waiting for probate, and normally free of tax.
The word doing the heavy lifting is 'service'
The cover exists because you work there. Leave the job and it goes with it, on the day you leave. So it disappears at exactly the moments people are most exposed: redundancy, a career break, going self-employed, taking time out to care for a parent, or retiring slightly earlier than planned. You cannot take it with you, you cannot convert it, and there is no notice period for your family.
There is a health dimension to that which people rarely consider. Death in service is arranged by the employer and generally does not ask you medical questions. Personal life cover does. If you spend fifteen years relying on a workplace benefit and then need your own policy at 52, after a diagnosis, the cover you can buy may be more expensive, restricted, or unavailable. The cheapest time to arrange personal cover is almost always earlier than the point you realise you need it.
The amount is set by your employer, not by your life
A multiple of salary is an administratively tidy way to set a benefit. It has nothing to do with what your household would actually need. It takes no account of your mortgage, your other debts, how many children you have, how old they are, or whether your partner works. Two people sitting at the same desk on the same salary can have completely different needs and identical cover.
Check the definition of salary too, because many schemes use basic pay only. If a meaningful part of your income comes from bonus, commission or overtime, the benefit may be calculated on a figure noticeably below what you actually earn and what your family actually lives on.
Take Martin, 41, a fictional client in a fairly ordinary position. He has a mortgage of around £280,000 with twenty years to run, two children under ten, and a wife who works part time. His employer provides three times salary. That is a real and welcome sum, but it does not clear the mortgage, and it was never designed to cover twenty years of childcare, food and school shoes on one reduced income. The gap is not a failing of the scheme. The scheme is simply answering a different question from the one his family would be asking.
Three things worth checking this week
None of this takes long, and most people have never done any of it:
• Find out what multiple you are actually on, and whether it is based on basic salary or total earnings
• Check who you have nominated, because the trustees are guided by your form and it may name an ex-partner or nobody at all
• Work out what your household would need, then look at the difference between that and the benefit
The nomination point catches people out more than any other. The money is normally paid at the trustees' discretion, and your expression of wishes is what guides them. Plenty of forms were filled in on the first day of a job a decade ago and have never been looked at since, through a marriage, a divorce and two children.
One technical note for higher earners. Where death in service is provided through a registered pension scheme, the lump sum is tested against the lump sum and death benefit allowance, which is £1,073,100 for most people. Benefits above that allowance, or paid where death occurs at 75 or over, can be taxed as income on the person receiving them. Death in service benefits are excluded from the change bringing pensions into inheritance tax from April 2027, but unused pension funds are not, which is a distinction worth understanding if you hold both.
In summary
Death in service is a good benefit and nobody should turn it down. It is not life cover, though. It ends when the job does, it is sized by a formula rather than by your family's needs, and it may be based on a narrower definition of salary than you think. Knowing what you have, checking who you have nominated, and understanding the gap between the benefit and the need is a short piece of work that most people have never done.
If you are not sure what your cover at work actually amounts to, or whether it would be enough, we can help you work out the gap and what closing it would cost. Speak to the ACJ team and we can go through it with you.