Lump sum and death benefit allowance (LSDBA) guide

What is the Lump Sum and Death Benefit Allowance? 

When the Lifetime Allowance (LTA) – which capped the amount savers could build up in pensions over their lifetime without incurring tax – was abolished in April 2024, new allowances were introduced to limit the combined value of lump sums that savers could take out of their schemes tax free. 

These are the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA).  

The LSA limits the value of lump sums that may be taken tax free during an individual’s lifetime, while the LSDBA includes all of those as well as lump sums paid before an individual’s 75th birthday as a death benefit payment or serious ill health lump sum payment.  

The LSDBA is currently £1,073,100 (equivalent to the value of the lifetime allowance before it was abolished). However, some individuals with transitional protection or enhancements to their lifetime allowance may be eligible for a higher allowance. 

Calculating the LSDBA 

When an individual is calculating how much LSDBA they have remaining (for example when a relevant lump sum is being paid), any relevant lump sums that have been taken since 6 April 2024 should be deducted first. 

If any lump sum benefits were paid before that date, transitional rules apply (see below). However, if an individual has used up all of their LTA, the LSDBA will be reduced to £0. In these cases it may worth investigating if a Transitional Tax-Free Amount Certificate (TTFAC) can be obtained (see below for more). 

Any lump sums within the LSA and LSDBA will be paid tax free. Tax charges will only apply if an individual has used up all of their LSA and LSDBA.

Lump sums that count towards the LSDBA 

Any lump sum that is categorised as a Relevant Benefit Crystallisation Event (RBCE) will be tested against the LSDBA. 

These include lump sums that may be taken during an individual’s lifetime or upon their death: 

• Tax-free portions of the Uncrystallised Fund Pension Lump Sums (UFPLS) – the first 25% of these withdrawals are paid tax free, with income tax payable on the rest. Individuals are able to make UFPLS withdrawals from their pension from the age of 55 (rising to 57 in 2028) without the need to crystallise their pot by moving into drawdown or purchasing an annuity. 
• Pension Commencement Lump Sums (PCLS), taken at the point individuals crystallise their pension benefits – often referred to as their ‘tax free cash’.  
• Stand Alone Lump Sums (SALS). These are a specific type of lump sum available to members of certain schemes on 5 April 2006. However, the tax-free element of SALS was capped in April 2023 when the abolition of the LTA was announced. Only the tax-free portion of a SALS counts towards the LSDBA. 
• Serious ill health lump sums. When an individual is terminally ill, with 12 months or less to live, any uncrystallised benefits may be taken as a tax-free lump sum (but only if the payment is made before their 75th birthday). 
• Lump sum death benefits. Any remaining benefits can be paid as a tax-free lump sum, if an individual dies before the age of 75. The payment needs to have been paid or designated within two years of the individual’s death. 

The exceptions to the rules 

There are some lump sum payments that don’t count towards the LSDBA. 

For example:  

• Lump sum death benefits where funds were crystallised before 6 April 2024, including PCLS payments 
• Trivial commutation lump sums – paid to defined benefit scheme members where their total pension benefits are valued at less than £30,000 
• Trivial commutation lump sum death benefits – payment to a dependent on the death of a member of a defined benefit scheme, when the value of benefits (on that scheme only) are less than £30,000 
• Winding up lump sums and winding up death benefits - paid out from occupational schemes that are being wound up, where the benefits are considered trivial and valued at less than £18,000 
• Small pot lump sums – with a value of less than £10,000 
• Charity lump sum death benefits – death benefits can be paid to a charity tax free if the individual dies before the age of 75. However, the individual must have nominated the charity and have no dependants 
• Death benefit lump sums paid two years after death will be subject to income tax at the recipient’s marginal tax rate. 
• Any lump sums paid after the individual’s 75th birthday will also be subject to income tax at the individual’s marginal tax rate.

Transitional protection 

The standard LSDBA is £1,073,100. However, individual’s with any transitional protection – available to some individual’s with larger pots prior to historic reductions to the LTA – may have a higher LSDBA.  

In these cases, the LSDBA will be based on the value of their protected LTA. 

Enhancements to the LSDBA 

Some individuals might also be able to apply for enhancement factors. 

However, these only apply in the following, very specific, circumstances: 

• If an individual has a pension credit after a divorce and that lump sum was tested against their ex-spouse’s LTA. 
• If a transfer has been made from a Registered Overseas Pension Scheme (ROPS) into a registered UK scheme 
• If contributions were made or benefits accrued in a UK pension on behalf of a ‘relevant overseas individual’ and UK tax relief was not available 

These events need to have happened before April 2024 and those that are eligible have until 5 April 2025 to apply. 

It’s also important to note that these factors will not increase the individual’s LSA, only the LSDBA – with both PCLS and UFPLS payments excluded from calculations. 

For those applying for enhancements after April 2024, the enhancement factor is calculated by dividing the additional benefit by £1m, prior to this date the factor is calculated by dividing the additional benefit by the LTA. 

To apply the enhancement, the LSDBA will be multiplied by the enhancement factor. 

Enhancement factors example: 

Bryony receives a pensions credit worth £150,000 after her divorce in January 2020. 

This gives her an enhancement factor of 0.14 (£150,000 / £1,073,100) 

If Bryony died at some point during the 2024/25 tax year her LSDBA would be boosted by a further £150,234 (£1,073,100 x 0.14), giving her a total allowance of £1,223,334. 

Transitional rules 

If lump sum benefits were taken out of a pension before 6 April 2024, transitional rules apply to adjust the LSDBA that the individual has available. 

In these cases, there are two ways to calculate the individuals LSDBA. 

Standard calculations 

The default option is to deduct 25% of the LTA used up by payments made before 6 April 2024. However, for serious ill health lump sums 100% of the LTA used is deducted. 

Let’s say Bob crystallises £500,000 from his SIPP in 2015/2016 when the LTA was £1,250,000. This uses up 40% of his LTA (he doesn’t have any transitional protection) and he takes £125,000 tax free cash. 

Bob died in May 2024 and his LSDBA is reduced by 25% of the LTA he had used already. 

This is calculated in the following way: 0.25 x 0.4 x £1,073,100 = £107,310. 

John’s remaining LSDBA is therefore £965,790 (£1,073,100 – £107,310). 

Alternative calculation 

However, it is possible to apply for a transitional tax-free amount certificate (TTFAC) instead and use an alternative calculation.  

This confirms the combined value of all tax-free lump sums paid prior to 6 April 2024 and provides an accurate figure to be deducted from the LSDBA at a later date. It could potentially boost the tax-free benefits an individual can take from their pension. 

In order to apply for a TTFAC, individuals (or their legal representatives if they have died) will need to provide evidence of all tax-free benefits taken prior to this date to any one of the schemes that they are a member of. The individual will also need to apply for the TTFAC before they make any tax-free lump sum withdrawals after 6 April 2024. This means individuals considering this option need to be organised and gather the relevant evidence promptly. 

Which calculation works best? 

Which calculation will work best will depend on the individual’s circumstances. 

However, as a guide, individuals who are more likely to get a higher allowance as result of applying for a TTFAC include those who: 

• Took minimal tax-free cash from their pension because it offered guaranteed annuity rates.
• Were in a defined benefit scheme and didn’t take the full amount of tax-free cash.
• Took lump sums out of their pension during years that the LTA was lower than £1,073,100 (2016/17 through to 2019/20).
• Transferred uncrystallised benefits into a qualified recognised overseas pension (QROPS).
• Took benefits which included disqualifying pension credits as part of pensions sharing on divorce.
• Are aged over 75 and still have uncrystallised funds.

Don’t overlook death benefit options on pensions 

The rules around the LSDBA and lump sum payments from pensions mean it’s important that individuals with larger pensions are in the most appropriate schemes with all the available death benefit options open to them. 

This is because it is only lump sum benefits that are tested against the LSDBA – not income. 

If an individual died before the age of 75 and their beneficiary took their death benefits as a lump sum and there was an amount in excess of the deceased’s LSDBA, it would be subject to tax at the beneficiary’s marginal rate. 

However, if, they instead had the option to use beneficiary’s drawdown they would be able to take funds out of the scheme whenever they wish, without paying tax on that money. (There are some circumstances where a lump sum payment will be the only option – for example the beneficiary is overseas and drawdown is restricted to UK residents) 

It is also important that individuals check that they have nominated their chosen beneficiaries and that those choices remain up to date.