What is the Lump Sum and Death Benefit Allowance?

The Lump Sum and death benefit allowance is one of three new allowances which have been introduced following the abolition of the Lifetime Allowance on 6 April 2024. 

In simple terms the Lump Sum and Death Benefit Allowance will limit the overall amount of lump sums that can be paid to your beneficiaries from your pension funds tax free if you die before your 75th birthday.

For most people this lifetime limit will be £1,073,100.

Any lump sums paid after your 75th birthday will automatically be subject to income tax at your beneficiaries marginal rate of tax.

What tax is payable on excess lump sums paid out when I die?  

If the lump sums paid to your beneficiaries exceed your Lump Sum and Death Benefit Allowance they will have to pay income tax at their marginal rate on the excess amount. 

What happens if my beneficiaries don’t want to receive a lump sum when I die? 

There is no longer a lifetime limit on the amount of pension funds you can build up during your life. 

If your beneficiaries decide to move their inherited pension fund into a nominee drawdown arrangement and take an income at a later date, there will be no excess charge applied to the fund regardless of the value of the pension pot they inherit. 

However, if you had passed your 75th birthday before you died they will have to pay income tax on any payments they receive from the inherited fund. These payments will be classed as an income payment even if your beneficiary withdraws the entire fund in a single transaction. 

If you died before your 75th birthday any withdraws they make will remain free from income tax in most cases. 

Are Lump Sum payments tax free if I have crystallised some or all of my pensions before I die and moved them into drawdown? 

This will depend on when you crystallised your pensions. 

Crystallised funds are created when you have taken a tax free lump sum from your pension (often referred to as a Pension Commencement Lump Sum) and leave the remainder of the fund invested. 

If you crystallised your pension funds between 6 April 2006 and 5 April 2024 and designated them into drawdown, they will have been tested against the old Lifetime Allowance at that time. Any lump sum payments to your beneficiaries from these drawdown funds will not be tested against the Lump Sum and Death Benefit Allowance. 

However, your Lump Sum and Death Benefit Allowance will have been reduced to take account of any lump sum payments you received during your lifetime; more on this below. 

How do I know what my Lump Sum and Death Benefit Allowance is? 

If you have not taken any benefits from your pension funds or are under the normal minimum pension age (age 55), then you will have the full Lump Sum Allowance and Death Benefit Allowance of £1,073,100. 

If you took benefits from your pension funds between 6 April 2006 and 5 April 2024 you should have received a Benefit Crystallisation Event (BCE) certificate from your pension provider. 

This will tell you how much of the Lifetime Allowance you used up at that time. 

HMRC has confirmed that they will assume that 25% of the amount on your BCE certificate was paid to you as a tax free lump sum while you were alive and the tax free amount will normally be deducted from your Lump Sum and Death Benefit Allowance. 

For example, if you took benefits from your pension pot in May 2023 and used up 60% of your Lifetime Allowance (which was £1,073,100 in the 2023/24 tax year) you will be deemed to have received a tax free lump sum payment of £160,965 (£1,073,100 x 0.6 x 25%). 

This is deducted from your Lump Sum and Death Benefit Allowance leaving you with a reduced allowance of £912,135 (£1,073,100 - £160,965).

Are there any other pension benefits that might reduce my Lump Sum and Death Benefit Allowance? 

Yes. When your Personal Representatives are dealing with your estate following your death they will need to gather the following information on your pension benefits to calculate how much Lump Sum and Death Benefit Allowance remains: 

• The value of any pension pots where you haven’t taken benefits before your died – these are commonly known as uncrystallised funds.
• The value of any drawdown funds and the date/s they were designated for drawdown. If the funds were designated into drawdown after 6 April 2024 they will be included in the assessment.
• Details of any Uncrystallised Funds Pensions Lump Sums (UFPLS) you received from your pensions as the tax free element of the UFPLS payment is included in the assessment.
• Any lump sums paid to you under serious ill health provisions by your pension provider
• Any lump sums paid to your beneficiaries as an Annuity Protection Lump Sum
• Any lump sums payable under a registered death in service scheme if you were employed at the time of your death

I have Lifetime Allowance Protection - will my Lump Sum and Death Benefit Allowance be higher?  

Yes, if you have a valid Lifetime Allowance Protection certificate then both your Lump Sum Allowance and your Lump Sum and Death Benefit Allowance will be higher.  
The value of both allowances will vary, depending on the type of protection you hold.

What happens if the tax free cash I received before 6 April 2024 was less than 25%? 

 If you can prove that the actual amount of tax-free cash you received was less than 25% of the value of the pension pot you crystallised, or that none was taken, then you can request a 'transitional tax-free amount certificate' showing the reduced amount to be deducted from your Lump Sum Allowance, rather than the standard 25% of the percentage of Lifetime Allowance used. 
It is your responsibility to make the application for a transitional certificate and you must provide complete evidence to prove your exact tax-free amount received as lump sums, to receive the certificate. 

If you are in receipt of a pension from a defined benefits pension scheme, or took benefits from a defined contribution pension scheme between 6 April 2016 and 5 April 2020 you may be eligible to apply. 

For individuals in this second category, the overall amount of tax free lump sum you will have been able to take would have been less than £268,275, as tax free cash could not exceed 25% of the Lifetime Allowance in force at that time.

So, although the LTA no longer exists, there is still some complexity and the potential for tax penalties on lump sum payments made to your beneficiaries when you die if you have a large pension fund. 

If you would like to know more about the Lump Sum and Death Benefit Allowance and how it will affect you and your beneficiaries, it may be worth getting financial advice or getting in touch with your Financial Adviser.

 This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.  The information contained within this article is based on our understanding of legislation, whether proposed or in force, at the time of writing. Legislation and taxation may be subject to change.

Pensions are a long term investment and any income derived from them is not guaranteed, the value of these investments can go down as well as up and you may not get back what you originally invested. 

The Financial Conduct Authority (FCA) does not regulate tax advice.