The Lump Sum Death Benefit Allowance (LSDBA)

In April 2024 the government removed the Lifetime Allowance (LTA) from pensions and replaced it with the Lump Sum Allowance (LSA) and the Lump Sum Death Benefit Allowance (LSDBA).

These governed the maximum lump sum a member could receive from the schemes held during their lifetime and the amount available without excess charges applying on lump sums paid following the members death

As of 2026, the standard LSA stood at £268,275.00 and the LSDBA stood at 1,073,100. Any lump sums paid following the members death in excess of the limit are taxed at the recipient's marginal income tax rate.

Please note there is no intention of these limits being increased or decreased at the present time.

The following will discuss the LSDBA in more detail covering how its calculated and what is excluded.

The lifetime allowance was replaced with three different allowances. If no benefits have been taken and the individual doesn’t have lifetime allowance protection, they will have the following allowances:

• the lump sum allowance (LSA) – £268,275
• the lump sum and death benefit allowance (LSDBA) – £1,073,100

Both of these allowances limit the amount of tax-free lump sum that can be paid.

There is also the overseas transfer allowance - £1,073,100

A check is made against this allowance when benefits are transferred to a QROPS. 

All these allowances are reduced if benefits were taken before 5 April 2024.

The lump sum and death benefit allowance applies at a relevant benefit crystallisation event (RBCE), when someone dies or on the payment of a serious ill-health lump sum. It is important to remember most tax-free lump sum benefits paid during the individual’s lifetime are also deducted from this allowance. 

The lump sums tested against the new allowances during the individual’s lifetime include:

• pension commencement lump sums (PCLS)
• the tax-free elements of any uncrystallised funds pension lump sum (UFPLS).

The tax-free lump sums tested against the LSDBA include:

• PCLS and the tax-free elements of any UFPLS.
• Uncrystallised funds lump sum death benefits.
• Drawdown pension fund lump sum death benefits and flexi-access drawdown lump sum death benefits from benefits crystallised on or after 6 April 2024.
• Serious ill-health lump sums.
• Defined benefit lump sum death benefits.
• Pension protection lump sum death benefits.
• Annuity protection lump sum death benefits.

Please note that PCLS payments prior to April 2024 are not classes as RBCE’s as such are treated differently when a lump sum is settled on the members death (The "Exemption" Rule)

The following benefits are not tested against the allowances.

Small lump sum payments (payments under £10,000) are not tested against either of the allowances.

The following benefits are not tested against the lump sum allowance:

• a winding up lump sum
• a trivial commutation lump sum.

The following benefits are not tested against the lump sum and death benefits allowance:

• a charity lump sum death benefit
• a trivial commutation lump sum death benefit.

Lump sum death benefits paid in respect of individuals who died on or after age 75 are not tax-free and because only tax-free lump sums are tested they do not use any lump sum death benefit allowance.

While the LSDBA is a broad "cap," on the amount that may be paid as a lump sum on death the true complexity lies in what doesn't count toward it or how certain payments escape the immediate tax charge. Understanding these three specific areas is essential for effective estate planning.

1.    Beneficiary Drawdown (The "Choice" Exemption)

The most significant exemption isn't a rule that ignores the money, but a choice in how it is received. When a pension member dies before age 75, the beneficiaries often have a choice, dependent on the scheme rules, to take the money as a lump sum or move it into a Beneficiary Drawdown account.

If the beneficiary chooses a lump sum, it is tested against the deceased's LSDBA. If they choose to keep it within a drawdown environment, the transfer is not tested against the LSDBA.

This allows the entire fund (even if it exceeds £1,073,100) to remain in a tax-advantaged wrapper. Future withdrawals from that drawdown account by the beneficiary remain tax-free, provided the original member died before 75.

2. The Age 75 Rule (Post-75 Exemption from LSDBA)

This is a technical exemption where the LSDBA ceases to be the relevant metric.

If a member dies on or after their 75th birthday, the LSDBA no longer applies to the death benefits.

This isn't necessarily "better." Instead of being tested against an allowance for tax-free status, all lump sums paid after age 75 are automatically taxed at the beneficiary's marginal rate. If taken as a beneficiary drawdown the income is also taxable, but the tax rates may be more favourable via drawdown due to the flexibility in how the beneficiary withdraws the funds.

The LSDBA is essentially a "pre-75" protection. Once the member hits 75, the concept of a "tax-free lump sum death benefit" effectively disappears, regardless of how much allowance was remaining.

3. Excepted Life Policies and Specific Death-in-Service Benefits

Certain types of "life insurance" held within or alongside pension structures are treated differently.

Life cover provided through a Registered pension scheme counts toward the LSDBA. However, cover provided through an Excepted Group Life Policy (EGLP) is not a pension benefit and therefore does not use up any of the £1,073,100 LSDBA.

Please note that this does not apply to the Hubwise SIPP as these are not offered within the product range.

It is important to note that while these might be exempt from the LSDBA (Income Tax), the 2024 Autumn Budget introduced changes. Starting April 6, 2027, most unused pension funds and death benefits will be included in the deceased's estate for Inheritance Tax (IHT) purposes, though Death-in-Service benefits from employer Group Life schemes remain largely excluded from this IHT expansion.

The LSDBA covers the value of all benefits held in pension schemes in the member’s name. 

To find out how much is left for death benefits, you must subtract the following payments from the LSDBA:

• Pension Commencement Lump Sums (PCLS): The tax-free cash the member took while alive.
• Uncrystallised Funds Pension Lump Sums (UFPLS): The 25% tax-free element of any flexible withdrawals taken.
• Serious Ill-Health Lump Sums: Paid to the member before age 75.

The LSA allows pension commencement lump sums (PCLS) payment to a member totalling £268,275 during their lifetime, excluding those who have a protection certificate.

The LSDBA is set at £1,073,100, unless protection is held.

The LSA is used for benefit events taken while a member is alive and looks at the PCLS paid at each event.

An example is shown below which indicates how the PCLS is used to reduce the LSA at each benefit event but also reduces the LSDBA at the same time.

Lump Sum Allowance    £268,275        

Lump Sum Death Benefit Allowance    £1,073,100        

Date Of Transaction    LSA Paid    LSA Remaining    LSDBA Remaining

08/04/2024    £41,859.05    £226,416    £1,031,240.95

20/12/2024    £50,000    £176,416    £981,240.95

01/01/2025    £100,000    £76,416    £881,240.95

If the value of the scheme is below the remaining LSDBA at the point of death a lump sum can be made without any additional tax charge being deducted.

If the value is in excess a tax charge would apply if a lump sum was taken by the beneficiaries, as such planning and advice is required for any beneficiary to ensure they receive them in the most tax efficient manner.

In relation to the LSDBA there is another exemption which relates to benefits taken prior to April 2024. The previous LTA is converted to the LSA/LSDBA so any benefits paid as a lump sum are not tested again and can be paid without the relevant tax charges.

This works as follows:

As the benefits were already tested against the old Lifetime Allowance (LTA) when the member originally took their benefits, the new legislation treats these funds as having already been accounted for. As a result, unlike funds that were untouched (uncrystallised) before April 2024, these pre-crystallised funds do not use up any of the beneficiary's or the deceased's £1,073,100 allowance when the payment is made.

The lump sum can be paid out without being capped by the LSDBA.

While the new allowance doesn't apply, the age of the deceased remains the ultimate test for whether tax is due ion the payments.

As the pots associated with the pre-April 2024 benefits can be paid without being tested against the LSDBA that remains it is important that pension schemes hold accurate records of the value of the pension tranches linked to the pre-April benefits so that can be passed to any new administrator if a transfer takes place.

Please note that even though the death benefit payment itself isn't tested against the LSDBA, the fact that the member took benefits before 2024 still affects the remaining allowance for any other (uncrystallised) pensions the member might have had.

By default, the system assumes the member took 25% of their used LTA as tax-free cash, for example if the member used 50% of the LTA (£536,550) before April 2024, the system automatically deducts £134,137 (25% of that 50%) from their available LSDBA for any remaining pots.

Depending on when benefits were taken the member may benefit from a Transitional Tax Free Cash Certificate, more information on these can be found in the article on Knowledgebase Transitional Tax Free Cash Certificates.

Since the abolition of the Lifetime Allowance (LTA) on April 6, 2024, the treatment of death benefits depends heavily on whether the funds were "crystallised" before or after that date and this impacts the payment of benefits via the Lump Sum options.

As stated, any payments over the LSDBA results in a tax charge, but there are exceptions to the rule.

For pre-April 2024 drawdown benefits, the rules are generally quite favourable, provided the member dies before age 75.

The most critical rule is that lump sum death benefits paid from funds crystallised before April 6, 2024, are not tested against the LSDBA.

Because these funds were already tested against the old Lifetime Allowance when they were originally put into drawdown (a Benefit Crystallisation Event or "BCE" under the old rules), the new legislation ensures they aren't "double-tested." 

If the member dies under 75, these funds can typically be paid out as a tax-free lump sum regardless of the member's remaining LSDBA.

If the member dies 75 or older, the benefits are taxed at the beneficiary's marginal rate (this remains unchanged from the old rules).

While the drawdown funds themselves aren't tested upon death, the fact that the member took drawdown before April 2024 reduces the total LSDBA available for any other benefits (like uncrystallised life cover or untouched pension pots).

To calculate the remaining LSDBA, a "Transitional Calculation" is used.

The Default Reduction: The total LSDBA (£1,073,100 or protected amount) is reduced by 25% of the LTA percentage used before April 2024.

Example If the member used 50% of their LTA to enter drawdown in 2020, the LSDBA is reduced by £134,137.50 (25% of 50% of £1,073,100).

If the beneficiaries choose to take the inherited funds as Beneficiary Drawdown rather than a lump sum:

• The transition is not a "Relevant Benefit Crystallisation Event" (RBCE).
• It is not tested against the LSDBA at all, even for funds that were uncrystallised.
• Withdrawals remain tax-free if the member died before age 75.

Example:

• A basic rate taxpayer is nominated as a beneficiary to a scheme valued at £1,200,000.00.
• No benefits had been taken from the scheme as such they are entitled to the full Lump Sum Death Benefit Allowance.
• The member dies before they turn 75 so benefits can be paid tax free up to the LSDBA if paid as a lump sum.
• If paid via income drawdown all income is paid tax free.