A DBLSDB, for death pre-crystallisation and before age 75 (that is, benefits not previously tested), paid within the 2 year window, triggers a lifetime allowance test. This is BCE 7 – where a relevant lump sum death benefit is paid on the death of the member. Before age 75, the amount paid, or crystallising, is the amount tested against the deceased member's lifetime allowance. Any part of the payment outside of the lifetime allowance is a chargeable amount and taxed at 55%, due on the recipient of the payment.
HMRC Pensions Tax Manual - PTM 088680
Personal representatives are responsible for identifying whether a chargeable amount has arisen following the payment of a relevant lump sum death benefit. They only need to do this after the payment of any death benefits which are tested against the deceased's lifetime allowance.
The provider may pay the lump sum death benefits in full, without regard to any lifetime allowance charge that may potentially be due. Where the personal representatives identify a chargeable amount, they must report this to HMRC, who then assess the recipient of any payment that may give rise to a chargeable amount (55% of the lump sum). Therefore, the personal representatives must be provided with the percentage of the standard, or protected, lifetime allowance used up by a relevant lump sum death benefit within three months of the payment. The personal representatives may also request the percentage of the standard, or protected, lifetime allowance that the member had crystallised to date, ie to enable them to calculate any charge due. This must be provided within two months of their request.
HMRC Pensions Tax Manual - PTM165000
If the member was 75 or over when they died then the DBLSDB is not tested against the LTA. There will have been a BCE 5 when they reached age 75. If the payment is outside of the two-year period and the member was under 75, the DBLSDB is not tested against the LTA but it is taxable as discussed below.
If BCE 7 (a relevant lump sum death benefit) is the first BCE triggered after A-Day, then any pre A-Day pension in payment must be included when calculating the percentage of lifetime allowance already used up. The calculation is 25 x the pension in payment at the date of death.
If the pre A-day pension in payment is a capped drawdown plan, then there is a further step to consider. You can read full details for this in our Lifetime Allowance: The Facts article.
HMRC Pensions Tax Manual - PTM088300