Lump Sum And Death Benefits Allowance (LSDBA)
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The Lump Sum and Death Benefit Allowance (LSDBA) is a new allowance introduced on 6 April 2024 following the abolition of the Lifetime Allowance (LTA).
The Lump Sum and Death Benefit Allowance (LSDBA) is a new allowance introduced on 6 April 2024 following the abolition of the Lifetime Allowance (LTA).
The LSDBA limits the total amount of tax-free lump sums that can be paid from registered pension schemes during a member’s lifetime and upon death. With a standard limit of £1,073,100 for individuals without transitional protection or enhancements, the LSDBA encompasses various types of lump sum payments, including pension commencement lump sums, serious ill-health lump sums, and certain death benefits paid to beneficiaires.
Several types of lump sums are considered ‘relevant benefit crystallisation events’ (RBCEs) and count towards the Lump Sum and Death Benefit Allowance:
Pension Commencement Lump Sums (PCLS): The entire PCLS counts towards the LSDBA, including scheme-specific tax-free cash where it exceeds 25% of the total value crystallising.
Uncrystallised Funds Pension Lump Sum (UFPLS): The tax-free element of an UFPLS payment is counted against the LSDBA.
Stand-alone Lump Sums: Only the tax-free element counts towards the LSDBA, limited to the value that could have been paid on 5 April 2023.
Serious Ill-health Lump Sums: These count if paid before age 75 when life expectancy is less than a year.
Lump Sum Death Benefits: These are included if death occurs before age 75 and the payment is made within two years of the scheme administrator being aware of the member’s death.
Certain lump sums are not counted towards the Lump Sum and Death Benefit Allowance:
The Lump Sum and Death Benefit Allowance differs for individuals with transitional protections:
| Protection Type | Lump Sum and Death Benefit Allowance (LSDBA) |
|---|---|
| Primary Protection | £1.8M + (£1.8M x primary protection factor) |
| Fixed Protection 2016 | £1.25M |
| Individual Protection 2016 | Lower of the value of benefits on 5 April 2016 or £1.25M |
| Fixed Protection 2014 | £1.5M |
| Individual Protection 2014 | Lower of the value of benefits on 5 April 2014 or £1.5M |
| Fixed Protection 2012 | £1.8M |
| Enhanced Protection | Value of uncrystallised funds on 5 April 2024 |
Individuals may apply for an enhancement factor to increase their Lump Sum and Death Benefit Allowance in specific circumstances that occurred before 6 April 2024:
The deadline for applying for an enhancement is 5 April 2025. As of 6 April 2024, the enhancement factor is calculated by dividing the extra benefits by £1M and rounding up to two decimal places. This factor is then applied to increase the individual’s LSDBA.
For benefits taken before 6 April 2024, an adjustment to the available Lump Sum and Death Benefit Allowance must be made. There are two methods to calculate this adjustment:
Standard Calculation: This method deducts 25% of the LTA used by benefits taken before 6 April 2024 from the LSDBA. For serious ill-health lump sums, 100% of all LTA usage is deducted.
Alternative Calculation: Individuals or their legal representatives can apply for a Transitional Tax-Free Amount Certificate (TTFAC) if they can evidence the exact amounts of tax-free lump sums paid before 6 April 2024. This method may result in a higher remaining LSDBA for some individuals.
The TTFAC allows for an alternative calculation that can potentially increase the remaining Lump Sum and Death Benefit Allowance. This option is beneficial for individuals who:
To apply for a TTFAC, individuals must provide evidence of tax-free lump sums taken before 6 April 2024. The application should be made to the scheme that will pay the first lump sum after 5 April 2024. Scheme administrators have three months to issue the TTFAC or explain why they’ve refused to issue it.
The introduction of the Lump Sum and Death Benefit Allowance emphasises the importance of being in the right pension scheme. Only lump sum death benefits are tested against the LSDBA, while death benefits paid as a pension/beneficiaries drawdown are not tested.
This distinction can have significant tax implications if the inherited pension comes from a scheme that only offers Return of Fund as a death benefit for example.
Ensuring clients are in schemes that offer all death benefit options can be crucial for those with substantial pension savings. It’s also essential to keep death benefit nominations up to date, especially for non-dependant beneficiaries.
If the Lump Sum and Death Benefit Allowance is exceeded, the excess amount may be subject to income tax. For lump sums paid during the member’s lifetime, the scheme will deduct tax at the individual’s marginal rate. In the case of death benefits, any excess over the remaining LSDBA will be taxed at the beneficiary’s marginal rate, with the legal personal representative responsible for reporting this to HMRC.