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Guide Death benefits and the lump sum and death benefits allowance

Certain payments of death benefits reduce the member's remaining lump sum and death benefits allowance (LSDBA). We cover this topic here along with what happens if the benefits are in excess of the LSDBA, following the changes in legislation made on 6 April 2024.

This guide is for financial advisers only. It mustn't be distributed to, or relied on by, customers. It's based on our understanding of legislation as at 6 April 2024.

Death benefits that reduce the lump sum and death benefit allowance

Relevant lump sum death benefits for the purposes of the lump sum and death benefit allowance include:

  •  Uncrystallised funds lump sum death benefits
  •  Drawdown pension fund lump sum death benefits
  •  Flexi-access drawdown lump sum death benefits
  •  Defined benefit lump sum death benefits
  •  Pension protection lump sum death benefits
  •  Annuity protection lump sum death benefits

Note - this doesn't include charity lump sum death benefits and trivial commutation lump sum death benefits as the payment of such lump sums is not a relevant benefit crystallisation event (RBCE).

The tax-free amount of any relevant lump sum death benefit reduces the deceased member’s LSDBA if the member is under 75 at date of death and it’s paid within 2 years of the date the scheme administrator becomes aware of the member’s death.

Where the member dies after age 75 or where death benefits are paid after the end of the relevant two year period, (see 'The two year rule'  for more information), these still count as relevant lump sum death benefits, but as they’re taxable they don’t use up any of the deceased member’s remaining LSDBA.

Note - if the beneficiary takes a drawdown or annuity option on the member’s death, these don't reduce the member's remaining LSDBA.

Example:

Alexander dies on 1 June 2024 aged 73, with an uncrystallised fund of £100,000. The scheme administrator pays a tax-free uncrystallised lump sum death benefit to his daughter on 1 September 2024.

This payment will use up £100,000 of Alexander’s LSDBA.

Lump sum death benefits paid from dependant’s, nominee’s or successor’s funds

From 6 April 2024, payment of either a flexi-access drawdown lump sum death benefit or drawdown pension fund lump sum death benefit is an RBCE.  Where either of these lump sums are paid on the death of a dependant, nominee or successor, it's that deceased individual's available LSDBA that the lump sum death benefit is measured against, not the available LSDBA of the original member or beneficiary.  This ensures that unlimited lump sums can't be paid free from income tax.

Note - where the lump sum death benefit is paid from funds which crystallised before 6 April 2024, these are not tested against any allowance, as they would have been tested against the original member's lifetime allowance.

Taxation of death benefits

Any relevant lump sum death benefit in excess of the member's remaining LSDBA 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.  The scheme administrator must provide a statement to the LPRs confirming the total amount of death benefits paid from any lump sum death benefit that is an RBCE.  The LPRs can then calculate the amount of LSDBA used up. 

When more than one RBCE occurs following the death of a member, the LPRs decide the order these are to be paid in.  This will in turn determine which payments are subject to income tax when the LSDBA is used up. 

Once the LSDBA has been reduced to nil, any subsequent relevant lump sum death benefits will be subject to income tax at the marginal rate of the recipient, or basic rate tax if paid to a 'non-qualifying person' within the relevant two year period, and the special lump sum death benefits charge if paid to a ‘non-qualifying person’ outwith the two year period (see the Death Benefits section for further information). Where income tax is due following the payment of a relevant lump sum death benefit it's the responsibility of the LPRs to notify HMRC that tax is due and HMRC will then notify the beneficiaries of their liability to income tax.  HMRC intend to update this process from 6 April 2025 to introduce new guidance for LPRs and a form for them to complete.

Note - where a lump sum death benefit is paid in respect of a deceased dependant, nominee, or successor, it's their age and date of death that's relevant for the tax treatment of the lump sum, not the original member's or beneficary's.

We cover how each of the different types of death benefit are taxed on the 'Death Benefits' page.