This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
There are three occasions when death benefits are tested against the lifetime allowance.
1. Under BCE 7 - lump sum death benefits paid from uncrystallised funds where the member died before age 75 are tested against the member's available lifetime allowance, so long as they’re paid within the relevant two year period (See ‘‘The uncrystallised funds two year rule’ for more information). The lifetime allowance charge was abolished from 6 April 2023, so any lump sum death benefit in excess of the member's remaining lifetime allowance is taxed as income at the recipient's marginal rate of tax, or using the emergency tax code on a month 1 basis if the tax code isn't known. It will be for the member's Legal Personal Representatives (LPRs), or the recipient(s) of the lump sum to carry out the lifetime allowance test and report any excess funds to HMRC.
2. Under BCE 5C - where an individual dies before age 75 and their uncrystallised funds are designated into dependant’s or nominee’s flexi-access drawdown within the two year period, the amount designated is tested as a BCE5C against the deceased individual’s available lifetime allowance.
3. Under BCE 5D (effective where the entitlement to the annuity arises on or after 6 April 2015) - where a member dies on or after 3 December 2014 and before age 75, and their uncrystallised funds are used within the relevant two year period to purchase a dependant’s or nominee’s annuity, the purchase price of the annuity is tested as a BCE5D against the deceased member’s available lifetime allowance.
For the 2023/24 tax year any excess lifetime allowance following BCE's 5C or 5D that's either designated into flexi-access drawdown for a dependant's or nominee's drawdown or used to purchase a dependant's or nominee's annuity, won't attract a lifetime allowance tax charge. This may change from 6 April 2024.
It’s the member’s LPRs who are responsible for carrying out the lifetime allowance test, not the scheme administrator.
When more than one BCE occurs following the death of a member, the BCEs are treated as having occurred simultaneously. This ensures that any tax due on lump sum death benefit payments that exceed the member's remaining lifetime allowance is split fairly where there are two or more recipients.
Note - if the payment of the uncrystallised funds lump sum death benefit or the designation into dependant’s or nominee’s flexi-access drawdown or purchase of a dependant’s or nominee’s annuity doesn’t take place until after the end of the two year period, there is no test against the lifetime allowance (BCE7, BCE5C or BCE5D, respectively, do not take place) but the lump sum or income will be taxable at the recipient’s marginal rate of tax, regardless of the fact that the member died before age 75.