Pensions
Last Updated: 6 Apr 24 10 min read
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.
1. Key Points
2. What is the Lump Sum and Death Benefit Allowance?
3. What level is the Lump Sum and Death Benefit Allowance?
4. How do you take account of benefits taken before 6th Apri 2024?
5. How is the Lump Sum and Death Benefit Allowance reduced?
6. What payments do not reduce the Lump Sum and Death Benefit Allowance?
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.
Protection Type |
Lump Sum Allowance |
|---|---|
| No Protection | £1,073,100 |
| Fixed Protection 2012 | £1,800,000 |
Fixed Protection 2014 |
£1,500,000 |
| Individual Protection 2014 | Between £1,250,000 and £1,500,000 (relevant amount) |
Fixed Protection 2016 |
£1,250,000 |
| Individual Protection 2016 | Between £1,073,100 and £1,250,000 (relevant amount) |
| Primary Protection | £1,800,000 multiplied by their primary protection factor |
| Enhanced Protection | Value of uncrystallised rights as at 5th April 2024 |
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.
ExampleRoy does not have any protections. He took PCLS and drawdown in June 2016 using up 30% of the LTA which was £1 million at the time. In October 2023 he took a Serious Ill Health Lump Sum using up 10% of the LTA which was £1,073,100 at the time. His default deduction is 40% x £1,073,100 = £429,240. Roy's initial LSA available is therefore £1,073,100 - £429,240 = £643,860. Had the 40% not included a lump sum Roy's deduction would have been £107,310. |
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 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.
ExampleRoy's initial LSDBA on the standard transitional basis is £1,073,100 - £492,240 = £643,860. He took PCLS and drawdown in June 2016 using up 30% of the LTA which was £1 million at the time. The PCLS was £75,000. In October 2023 he took a Serious Ill Health Lump Sum of £107,310 using up 10% of the LTA which was £1,073,100 at the time. Roy successfully applies for a transitional tax free amount certificate. His initial LSDBA is now reduced by £182,310 meaning his available LSDBA is increased to £890,790. |
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 aggregate value of the individuals pension 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:
ExampleSandi had a scheme pension in payment of £32,000 a year when she died. She had no protection. 25 x £32,000 is £800,000. The initial deduction from her LSDBA is £800,000 x 25% = £200,000 Her available LSDBA is £1,073,100 - £200,000 = £873,100. |
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.
Lifetime Benefits |
Death Benefits (amount paid) |
|---|---|
| Standard PCLS – the amount paid | Defined Benefit Lump Sum Death Benefit |
| PCLS with scheme specific lump sum protection – the total PCLS paid | Uncrystallised Lump Sum Death Benefit |
SALS – the total non-taxable amount of the lump sum paid |
Annuity Protection Lump Sum Death Benefit |
| UFPLS – the non-taxable amounts paid | Pension Protection Lump Sum Death Benefit |
| Serious Ill Health Lump Sum – the amount paid | Drawdown/Flexi-access Drawdown Lump Sum Death Benefit |
| Dependant, Nominee or Successors Flexi-access Drawdown Lump Sum Death Benefit |
Not all lump sum death benefits use up LSDBA. There are three exclusions
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