Pension Death Benefits for Beneficiaries and Lump Sum Death Benefit Allowance
Published / Last Updated on 12/07/2024
We have explained many times on this site that on 5th April 2024, the Lifetime Allowance (LTA) was abolished, and a new Lump Sum Allowance (LSA) started on 6th April 2024 with 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 and a new Lump Sum Death Benefit Allowance (LSBDA), the maximum tax free lump sums payable on death to beneficiaries also started at the old LTA rate of £1,073,100 less any LSA taken by the deceased in life.
What about Protected LTAs and their affect on LSDBA? See: LTA and LSDBA
Pension Death Benefits and LSDBA from 6th April 2024
Your LSDBA is either £1,073,100 or a Protected Amount if you previously had Lifetime Allowance Protection.
LSDBA = Your LSDBA less any LSA (tax free cash lump sums) taken since 6th April 2024 = Your Remaining LSDBA
General Rules for Taxation of Death Benefits:
Crystallised Pensions Benefits before 6th April 2024
- E.g. if the deceased has taken all tax-free cash and the balance of taxable pension benefits being paid or ready to be paid to the deceased as an annuity or flexible drawdown = No Tax as not included in the LSDBA test but any tax-free cash taken already taken by the deceased will reduce the available LSDBA.
Uncrystallised Pensions Benefits After 6th April 2024
- No tax to pay if lump sums taken are below remaining LSDBA
Important Note: Only lump sum death benefits are tested against the LSDBA not pensions income or pensions drawdown.
Death Before Age 75
Lump sum death benefits below remaining LSDBA = Tax Free
Lump sum death benefits above remaining LSDBA = Taxable at beneficiary’s marginal rates of income tax.
BUT: Death benefits paid as ‘pension’ are not tested against the LSDBA. Therefore, if beneficiaries choose “Beneficiary Drawdown” to take the deceased’s remaining pension benefits (death before age 75), they are tax free.
- You must ensure that your pension provider offers Beneficiary Drawdown on death.
Death After Age 75
Both crystallised and uncrystallised funds whether taken as either a lump sum or as a drawdown pension are subject to the beneficiary’s marginal rate of income tax income tax with no effect on LSDBA.
