Question:

The new lump sum allowance appears to be relatively straightforward – it is only tax-free lump sums that are tested against this. However, what is tested against the lump sum and death benefit allowance?

Paul’s answer:

You are right about the lump sum allowance, which is £268,275 for clients without protection. Only tax-free lump sums are tested against this allowance. So, if a client takes a £100,000 PCLS payment, it uses £100,000 of their lump sum allowance. However, that payment also uses part of the client’s lump sum and death benefit allowance, which is set at £1,073,100 for those without protection. But, as the name suggests, there are other payments that are tested against this allowance.

First, serious ill health payments – this is the only other test that is made during a member’s lifetime. Serious ill health payments are permitted where the individual is under the age of 75, has uncrystallised benefits, and unfortunately has a diagnosis of less than 12 months to live. In these cases, HMRC allow the individual to access their pension savings tax free up to the £1,073,100 limit. But, of course, the individual would be taking money from an IHT-favourable environment and bringing it into their estate so, quite clearly, this doesn’t happen that often.

Other than that, lump sum death benefits, where death occurs before age 75, are tested. Going forwards, there will be a test on all lump sum death benefits paid from pension arrangements with three exceptions. Two of these we don't come across very often – charitable lump sum death benefits and trivial commutation lump sum death benefits. The other exception is one you will come across as an adviser – this is where a client crystallised benefits prior to this tax year. So, where a client dies before 75 and they crystallised benefits before 6 April 2024, then there won't be a test if the benefits are paid as a lump sum.

This test on crystallised benefits represents a change from the old regime. In the past, only uncrystallised funds were tested on death before age 75. Going forwards, some crystallised funds will be tested as well.

Important information

This article provides information and is only intended to provide an overview of the current law in this area and does not constitute financial advice, tax advice or legal advice, or provide any recommendations. The value of benefits depends on individual circumstances. The minimum age clients can normally access their pension savings is currently 55, and is due to rise to 57 on 6 April 2028, unless they have a lower protected pension age. Different options may have different effects for tax purposes, different implications for pension provision and different impacts on other assets and financial planning.

Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.

UKM0524/386857/SSO/0525