Lump sum allowance

The lump sum and death benefit allowance

The lump sum and death benefit allowance applies to the payments that use up the lump sum allowance as well as the tax-free element of serious ill health lump sums and certain non-taxable lump sum death benefits.

For most people the lump sum and death benefit allowance is £1,073,100. Your lump sum and death benefit allowance could be different if you have lifetime allowance protection.

What uses up the lump sum and death benefit allowance?

Like the lump sum allowance, certain types of payment will use up the lump sum and death benefit allowance. These include:

• PCLS (also known as a pension tax-free cash lump sum)
• The tax-free element of an Uncrystallised Funds Pension Lump Sum (UFPLS)
• The tax-free element of serious ill health lump sums, and
• Non-taxable lump sum death benefits (excluding charity lump sum death benefits, trivial commutation lump sum death benefits and lump sum death benefits paid from funds crystallised before 6 April 2024)

The above lump sums (PCLS, UFPLS, Serious ill-health and most lump sum death benefits – not including the exclusions mentioned) are all examples of what are called ‘Relevant Benefit Crystallisation Events’ (RBCEs).

New rules example

Let’s say you’d never taken pension benefits before and wanted to move £100,000 of your pension into drawdown. You can typically take up to 25% of the amount moving into drawdown as a PCLS (tax-free cash). It would be the PCLS amount that would use up your lump sum and lump sum and death benefit allowances.

Under the new rules, £25,000 (25% of the amount you move into drawdown) would use up your lump sum and lump sum and death benefit allowances.

This means you’d have £243,275 of your lump sum allowance and £1,048,100 of your lump sum and death benefit allowance left (based on the standard allowances).

The overseas transfer allowance

The overseas transfer allowance will apply to any pensions that you transfer overseas to a Qualifying Recognised Overseas Pension Scheme (QROPS). For most people, the standard allowance is £1,073,100. If you have lifetime allowance protection, your overseas transfer allowance may be different.

Transfers to QROPS that exceed the overseas transfer allowance will normally be subject to the Overseas Transfer Charge (OTC). There are also other circumstances where an OTC may apply.

FAQs

• What if I have already used up all my lifetime allowance under the old rules?

  Those people that have already used all their lifetime allowance will normally be assumed to have no remaining lump sum and lump sum and death benefit allowances, although they (or, if deceased, their personal representatives) may be able to apply for a transitional tax-free amount certificate that could give them higher remaining allowances. These can only be applied for before the first RBCE after 5 April 2024.

  For more information on transitional tax-free amount certificates, download our essential lump sum allowance guide.

• What if I’ve used some of my lifetime allowance under the old rules?

  How lifetime allowance used under the old rules affects the new allowances will normally be based on the ‘standard transitional calculation’ as set out by HMRC. As above, individuals (or, if deceased, their personal representatives) may be able to apply for a transitional tax-free amount certificate that could give them higher remaining allowances than under HMRC’s ‘standard transitional calculation’. These can only be applied for before the first RBCE after 5 April 2024.

  For more information, including examples and further details on transitional tax-free amount certificates, download our essential lump sum allowance guide.

• What will the new allowances mean for my beneficiaries if they inherit my pension as a lump sum?

  Like under the old lifetime allowance rules, if you die before age 75, any lump sums your beneficiaries get that are within your remaining lump sum and death benefit allowance will normally be free of income tax. If any part of the lump sum goes over your remaining lump sum and death benefit allowance, then the excess will normally be taxable at your beneficiaries’ marginal rate. (From 2027, where an estate is valued over the inheritance tax threshold, some pensions may be subject to inheritance tax.)

  If you die aged 75 or over, your beneficiaries will have to pay tax at their marginal rate on any lump sum taken.

• What will the new allowances mean for my beneficiaries if they inherit my pension via beneficiary drawdown or annuity?

  Like under the old rules, if you die before age 75, any income payments your beneficiaries get from a beneficiary drawdown or beneficiary annuity will normally be free of income tax. Unlike with most lump sum death benefits, the amount that can be inherited via beneficiary drawdown or annuity isn’t subject to the new allowances. If you die aged 75 or over, any income payments your beneficiaries get from a beneficiary drawdown or beneficiary annuity will be subject to income tax at their marginal rate. (From 2027, where an estate is valued over the inheritance tax threshold, some pensions may be subject to inheritance tax.)

  It makes sense to review your nominated beneficiaries regularly, especially when there’s a change in your circumstances.

  If you have an HL Self-Invested Personal Pension (SIPP) you can update your nominated beneficiaries through ‘account settings’ in your online account. You can also download a postal expression of wish (nomination) form if you’d prefer.

  For more details on what happens to your pension after you die, download our free guide.