Lump Sum and Death Benefit Allowance

The Lifetime Allowance (LTA) was abolished from 6th April 2024 and replaced with three new allowances. The Lump Sum and Death Benefit Allowance (LSDBA) limits the amount of all lump sum payments that can be paid tax free to all individuals.

The LSDBA is the overall limit on the amount that can be paid tax free when lump sums are paid that are Relevant Benefit Crystallisation Events. 

It only applies to death benefits paid where the deceased was under 75 when they died, and it is paid out within 2 years of the scheme administrator becoming aware of the members death.

It impacts benefits paid to individuals in the form of "tax-free cash", Serious Ill Health Lump Sums and Lump Sum Death Benefits.

An individuals LSDBA is adjusted to take account of some tax free amounts that were paid prior to 6th April 2024.

It is then reduced when any RBCE’s occur. 

RBCEs are defined for the LSDBA as being a “relevant lump sum” or a "relevant lump sum death benefit". 

Any Lump sums paid in excess of the LSDBA will be subject to the individual, or the beneficiaries, marginal rate of tax.

Schemes and providers pay out pre 75 death benefits (settled within 2 years of the scheme becoming aware) gross like they did under the previous LTA regime. Responsibility for identifying excess amounts and notifying HMRC rests with the deceased's personal representatives.

Pension Scheme Newsletter 157 points out that legislation operates to ensure that lump sum death benefits paid from funds which crystallised prior to 6 April 2024 will not reduce an individual’s lump sum and death benefits allowance, but that the permitted maximum could still limit the tax-free amount that can be paid. As previously confirmed, the policy is that lump sum death benefits paid from such funds would be tax-free because these funds have already been tested against the LTA. Further legislation will be brought forward, through regulations, to ensure that the correct policy outcome is achieved.

The standard allowance is £1,073,100, the same as the final Lifetime Allowance. There are no provisions for increasing this allowance.

Those with LTA protections will have a LSDBA based on their protected LTA.

For anyone who has used 100% of the Lifetime Allowance, their starting LSA and LSDBA is £0.

They may be able to get some LSDBA if they meet the conditions for a Transitional Tax Free Amount Certificate.

Those with a previous LTA enhancement factor e.g. a pension credit factor for a post April 2006 divorce will have their LSDBA enhanced by their factor(s).

Where an individual becomes entitled to benefits before Normal Minimum Pension Age then the allowance may be reduced by 2.5% for each year early entitlement rises.

The standard LSDBA will need to be reduced at the first RBCE after 5th April 2024 to take into account benefits taken under the LTA regime.

This initial deduction depends on circumstances. There are three different basis.

This basis is used for those who had benefits tested under the Lifetime Allowance regime and do not hold a Transitional Tax Free Amount Certificate.

The deduction depends on whether a Serious Ill Health Lump Sum (SIHLS) has been paid prior to 6 April 2024.

• If a SIHLS has been paid prior to 6 April 2024, the deduction is 100% of the LTA used as at 5 April 2024.
• If a SIHLS has not been paid prior to 6 April 2024 then it is 25% of the LTA used as at 5 April 2024, the same as the LSA used amount.
   

This basis is used where an individual has a Transitional Tax Free Amount Certificate.

The certificate will show a lump sum and death benefit transitional tax free amount reflecting the actual tax free amounts paid prior to 6th April 2024.

The deduction will be the lump sum transitional tax free amount shown on the certificate. 

More information can be found in our Transitional Tax Free Amount Certificates page.

This basis is used where an individual first took benefits prior to the introduction of the LTA on 6th April 2006 and did not have a benefit crystallisation event between 5th April 2006 and 6th April 2024. 

The deduction is 25% of the capitalised value of the individual’s pensions in payment immediately prior to the first RBCE. 

Scheme pensions and annuity payments are valued by multiplying the annual rate of pension payable by 25.

Drawdown plans are valued as follows:

• Capped drawdown, 25 times 80% of the maximum amount that may be paid in the drawdown pension year, or
• where the individual was in Flexible Drawdown prior to 6th April 2015, 25 times 80% of the maximum amount that could have been paid in the drawdown pension year in which they accessed flexible drawdown, or
• where a drawdown fund was converted to a flexi access drawdown fund,  25 times 80% of the maximum amount that could have been paid in the drawdown pension year in which the conversion occurred had no conversion happened.

As originally enacted the age 75 BCE tests were included in the LTA previously used amount. Subsequent legislation introduced in November 2024 altered this. 

Where a member has had an age 75 BCE test (which would not have produced tax free amounts) AND they did not take any further lump sum amounts between age 75 and 6th April 2024, the age 75 BCE can be ignored. 

The individual will still go through the standard transitional calculation, and at the point they want to crystallise further benefits the scheme will contact the individual to ask if they have accessed further lump sums after age 75 and before 6th April 2024. If they haven’t, the standard calculation can be used disregarding any percentage amount crystallised by an age 75 BCE.

If the individual has taken further lump sums between turning 75 and 6th April 2024, the BCE used at age 75  is still taken into account, and the individual can apply for a TTFAC if appropriate/eligible.

The LSDBA is reduced initially to take account of any benefits taken prior to 6th April 2024.

Thereafter it is reduced by the tax free amounts paid at any Relevant Benefit Crystallisation Events.

The deduction is a monetary amount and depends on the type of payment. These are explained in the table below.

Not all lump sum death benefits use up LSDBA. There are three exclusions

• Charity Lump Sum Death Benefit
• Trivial Commutation Lump Sum Death Benefits
• “Relevant lump sum death benefit” does not include a lump sum death benefit if and to the extent that it is paid in respect of rights that, before 6 April 2024, crystallised under the LTA.