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The LSDBA and death benefits payments
Under the new Lifetime Allowance (LTA) replacement regime, one of the three new allowances is the Lump Sum and Death Benefit Allowance (LSDBA). This is set at £1,073,100, except where LTA protections apply.
The LSDBA is used when certain lump sum death benefits are paid (in addition to serious ill health lump sum payments, pension commencement lump sum payments and the tax-free portion of uncrystallised funds pension lump sum payments). If an individual took benefits prior to 6 April 2024 that used some or all of their LTA, their LSDBA may be reduced.
The following information is a rough guide to the tax treatment of money purchase death benefit payments.
Which death benefits are tested against the LSDBA?
- Defined benefit lump sum death benefits
- Uncrystallised funds lump sum death benefits
- Pension protection lump sum death benefits
- Annuity protection lump sum death benefits
- Drawdown lump sum death benefits
- Flexi-access drawdown lump sum death benefits
Payments to beneficiary drawdown are not tested against the Lump Sum and Death Benefit Allowance.
Tax treatment of money purchase death benefits – death after 6 April 2024
The process illustrated below assumes benefits are settled within two years of death.
Where death occurs after 75
- If benefits are paid as a lump sum, the whole sum is subject to the recipient's marginal rate(s) of tax in the year of payment.
- If benefits are paid to beneficiary drawdown the initial settlement to the drawdown arrangement is not subject to tax, however any benefits subsequently withdrawn are taxable at the recipient's marginal rates.
Where death occurs before 75
- If benefits are paid as a lump sum, any benefits that exceed the remaining LSDBA are taxable at the recipients marginal rate(s) of tax.
- If benefits are paid to beneficiary drawdown there is no tax due on the payment to beneficiary drawdown, and the subsequent withdrawals will be tax free.
Further information
If you want more help with understanding the rules relating to the LTA replacement, please visit the page Replacement of the lifetime allowance.
The following links take you to the Gov.uk site and the relevant area of HMRC's 'Pensions Tax Manual':