Lump Sums and Death Benefit Allowance (LSDBA)
The new rules have also introduced a second new cap on the tax-free death benefits available from a pension, the LSDBA. This has been set at £1,073,100 and there is no indication the cap will be increased in future.
Where an individual has valid LTA protection under one of the forms of LTA protection mentioned previously, and this remains valid, the LSDBA will be set by the value of their LTA protection. The LSDBA for an individual with Enhanced Protection is expected to be set by the value of their pension benefits on 5 April 2024.
The LSDBA includes the value of any LSA taken by the individual in their lifetime. It is not yet clear how lump sums from pension benefits crystallised prior to 6 April 2024, or pensions in payment before 6 April 2006, will be considered here.
The new cap does not mean an increase in tax payable on pension benefits on death where the pension benefits have not yet been crystallised. This is because prior to 6 April 2023, a 55% LTA tax charge would have applied to the value of any excess uncrystallised funds lump sum death benefit over an individual’s available LTA (or protected LTA). Now that the LTA tax charge has been removed, any excess uncrystallised funds lump sum death benefits will be subject to Income Tax at the beneficiaries’ marginal rate (up to 45%).
The new rules will have a detrimental impact for any individuals who die before age 75, where they have already crystallised their pension benefits. Under the current rules, the value of crystallised pension benefits in drawdown, or flexi-access drawdown, or as a dependant’s annuity, are not tested against the LTA on death and can be passed on to beneficiaries’ completely tax free. However, from 6 April 2024, should an individual pass away before age 75, the value of their pension benefits on death will be tested against the LSDBA and any excess will be taxed at the beneficiaries’ marginal rate of income tax.
Regular pension income left to a spouse, partner, or dependant is not a lump sum death benefit, and will not fall within the LSDBA, and it is not clear how these pensions will be treated under the new rules. As there is no lump sum benefit, it would seem that the benefits will be fully taxable on death. This is much more severe than under current rules where this type of pension can be passed on completely tax free on death where there is a survivor’s pension. Further clarification is needed here.