Lifetime Allowance Protection and Lump Sum Death Benefit Allowance
Published / Last Updated on 12/07/2024
As many will know, the maximum amount you can accumulate in pensions during your lifetime, the Lifetime Allowance (LTA) of £1,073,100, was abolished on 5th April 2024. This means that throughout your lifetime, you can currently build up unlimited funds and benefits in pensions as the LTA has gone. At the same time, two new allowances were introduced:
1. Lump Sum Allowance (LSA) – a maximum tax-free lump sums can be paid in your lifetime of 25% of the old LTA i.e. 25% X £1,073,100 = £268,275.
2. Lump Sum Death Benefit Allowance (LSDBA) – a maximum amount of lump sums that can be paid on death to beneficiaries’ tax free (less any tax free LSA already taken by the deceased) of £1,073,100 (less any tax-free lump sums LSA already taken). Any excess over the LSDBA paid as a lump sum to beneficiaries will be taxable at beneficiaries’ marginal rates of income tax.
- Death before age 75: pension funds can be paid as a lump sum or as a drawdown pension to any beneficiary income tax free, irrespective of whether they derived from uncrystallised funds (not taken any benefits) or crystallised funds (where you have taken some funds already e.g. tax free lump sum). HMRC’s Pension scheme newsletter 157 confirmed that the payment of a LSDB from funds which crystallised prior to 6 April 2024 may be limited by the permitted maximum. This is unintentional and a change to the small print in the Statute is planned.
- Death after age 75: pensions funds paid to beneficiaries as drawdown income or as a lump sum are taxed at the beneficiary’s marginal rate of income tax.
- Death after age 75: pensions can be paid as a lump sum to a trust with a 45% tax charge.
Tax Free Cash Lump Sums Taken Before 06/04/2024
- Even if you took a lower tax-free lump sum e.g., to secure a larger pension income, it is automatically assumed to be 25% of the fund. E.g. You had a pension fund worth £200,000 of which you only took £25,000 as a tax-free lump sum and the balance of £175,000 to buy an annuity will automatically be assumed that you took 25% of the fund tax free even if you did not, in this case assumed £50,000 even though you only took £25,000.
- This means you will have a lower remaining LSA and LSDBA unless you get a Transitional Tax-Free Amount Certificates (TTFAC) to prove that you took lower than 25%, subsequently increasing your remaining/unused LSA and LSDBA.
Higher Lifetime Allowance Protections Above the Old LTA?
- April 2006 - The LTA was introduced by the Labour Government at £1.5m. If at the time you had pension funds worth more than this you could apply for Primary Protection, set at the value of your pension fund at the time including a primary protection enhancement factor (the amount you were already over the new LTA)
- April 2006 – With the LTA at £1.5m, the maximum tax-free cash lump of 25% of this was set at £375,000. If at the time you had a tax-free lump entitlement worth more than this you could apply for Enhanced Protection for tax free lump sums, set at 25% of the value of your pension fund at the time or any protected/higher tax-free cash entitlement at the time.
- LTA then increased to £1.8m by 2010 and then started to fall in 2012, 2014 and 2016.
- April 2012 – LTA was reduced from £1.8m to £1.5m. If you already exceeded £1.5m, you could then apply for Fixed Protection 2012 at £1.8m LTA with no further pension benefit increases/contributions allowed.
- April 2014 – LTA was again reduced from £1.5m to £1.25m. If you already exceeded £1.25m, you could then apply for Fixed Protection 2014 at £1.5m LTA with no further new pension benefit increases/contributions allowed OR if you already exceeded £1.25m but below £1.5m e.g. £1.4m, you could apply for Individual Protection 2014 at £1.4m and continue to accrue new pension benefits.
- April 2016 – LTA was again reduced from £1.25m to £1m. If you already exceeded £1m, you could then apply for Fixed Protection 2016 at £1.25m LTA with no further new pension benefit increases/contributions allowed OR if you already exceeded £1m but below £1.25m e.g. £1.1m, you could apply for Individual Protection 2016 at £1.1m and continue to accrue new pension benefits.
- April 2018 – LTA increases to £1,030,000, no new higher protections introduced as LTA was increased rather than reduced.
- April 2019 – LTA increases to £1,055,000, no new higher protections introduced as LTA was increased rather than reduced.
- April 2020 – LTA increases to £1,073,100, no new higher protections introduced as LTA was increased rather than reduced and remained at this level until LTA abolished in 2024.
What Happens Now If You Have ‘Protected’ LTAs and Its Affect on the New Lump Sum Death Benefit Allowance £1,073,100 (set at the old LTA)?
Type of Protection and your LSBDA
- Primary Protection 2006: LSDBA is £1.8m + (£1.8m X primary protection factor)
- Enhanced Protection 2006: LSDBA is the value of uncrystallised funds as at 05/04/2024.
- Fixed Protection 2012: LSDBA is £1.8m
- Fixed Protection 2014: LSDBA is £1.5m
- Individual Protection 2014: LSDBA is the lower of:
- £1.5m or
- Value of benefits as at 05/04/2014
- Fixed Protection 2016: LSDBA is £1.25m
- Individual Protection 2016: LSDBA is the lower of:
- £1.25m or
- Value of benefits as at 05/04/2016
The area of Lump Sum Death Benefit Allowance (LSDBA) and previously secured higher Lifetime Allowance (LTA) protection is complex, and you should contact us for formal advice.
