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The lump sum and death benefit allowance

From 6 April 2024, the lifetime allowance (LTA) is being scrapped and there will be three new pension allowances: the Lump sum allowance (LSA), the Lump sum and death benefit allowance (LSDBA) and the Overseas transfer allowance (OTA). In this article we look at the LSDBA and how it works.

The information on this page is based on our understanding of the Finance Act 2024 and on guidance issued by HM Revenue and Customs, which is subject to change. We expect further regulations to be made in March, which may change our understanding.

What is the Lump Sum and Death Benefit Allowance?

The Lump Sum and Death Benefit Allowance (LSDBA) is one of the new allowances that will replace the Lifetime Allowance from 6 April 2024. It has been set at the same level as the 2023/2024 lifetime allowance limit of £1,073,100 and will apply at a Relevant Benefit Crystallisation Event (RBCE), when a serious ill-health lump sum is paid, or when someone dies. There is no provision in the draft legislation to allow for any future increase to the LSDBA

Most tax-free benefits paid during an individual’s lifetime will be deducted from this allowance with some exceptions.

LSDBA where there is Lifetime Allowance Protection

If an individual has registered for a form of Lifetime Allowance protection and that protection is still valid, then their LSDBA will be set at the same level as their individual lifetime allowance protection.

For example, someone with Fixed Protection 2014 will have a LSDBA of £1.5m.

Anyone with Enhanced Protection will have their LSDBA set at the level of benefits that can be taken when it comes into force on 6 April 2024 i.e., the value of their uncrystallised rights on 5 April 2024.

Relevant Benefit Crystallisation Events

Despite the similar terminology, RBCEs are very different from the Benefit Crystallisation Events (BCE) in place before 6 April 2024. The new RBCEs are any relevant lump sums or any relevant lump sum death benefits paid on or after 6 April 2024.

Any RBCE taken on or after 6 April 2024, will be deducted from the LSDBA including:

  • Pension Commencement Lump Sums
  • The tax-free element of an Uncrystallised Funds Pension Lump Sum
  • Serious Ill Health Lump Sum
  • Uncrystallised funds lump sum death benefits
  • Drawdown/Flexi-access Drawdown lump sum death benefits from benefits crystallised on or after 6 April 2024
  • Defined Benefits lump sum death benefits
  • Pension protection lump sum death benefits
  • Annuity protection lump sum death benefits

Payments that are not RBCEs

There are no RBCEs for the following payments as these are not paid tax-free:

  • Taxable pension income
  • Lump sum death benefits paid after age 75 or paid more than 2yrs after the date of notification when death occured after before age 75

The following payments are also excluded:

  • Charity lump sum death benefits
  • Trivial Commutation lump sum death benefits
  • Small Pots

Benefits taken before 6 April 2024

Any benefits taken between 6 April 2006 and 5 April 2024 will reduce the LSDBA. The first step is to find out if any serious ill-heath lump sums or lump sum death benefits have been paid in this period when the individual was under age 75. If there have been, then the LSDBA is reduced by 100% of all LTA used up prior to 6 April 2024. If there have been no such payments, the LSDBA is reduced by 25% of the previously used LTA amount. 

If the total amount of the lifetime allowance previously used is greater than the individual’s LSDBA, then their LSDBA will be nil.

Any pre-6 April 2024 crystallised benefits i.e. drawdown, won’t be counted against the member’s LSDBA when the member dies before they reach the age of 75 on or after 6 April 2024

This is the default position for reducing the LSDBA by the benefits taken before 6 April 2024, but a member can apply for a transitional tax-free amount certificate which is covered next.

 Transitional tax-free amount certificate

If an individual has pre-6 April 2024 crystallised benefits where no amount, or less than 25%, had been taken tax-free, they can apply for a transitional tax-free amount certificate to limit the amount their LSDBA is reduced by.

This could apply to situations such as:

  • Where a scheme pension was taken but the individual decided not to commute pension for PCLS, so no PCLS was paid,
  • On a transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS), or
  • If less than 25%, or no, tax-free cash was paid when benefits were crystallised, for example, if a Guaranteed Minimum Pension restricted it.

An application for the certificate must take place before the first RBCE post-6 April 2024 takes place, and the individual can apply to any scheme they are a current member of, but it’s expected that they will apply to the scheme where the first RBCE is being paid from.

You can find more information on this subject in our Transitional Protection article.

Benefits taken before April 2006

Where pre-6 April 2006 benefits are in payment and there has been no BCE between 6 April 2006 and 5 April 2024, the LSDBA is reduced at the first RBCE on or after 6 April 2024, by 25% of:

  • 25x the current level of the annual annuity, or scheme pension, in payment
  • 25x 80% of the maximum annual capped drawdown pension payable in the drawdown pension year in which the first RBCE happens.

Benefits over the LSDBA

Any benefits taken that exceed an individual’s LSDBA will be taxed at the recipient’s marginal rate of tax.