Lump Sum and Death Benefit Allowance Explained

What Is the Lump Sum and Death Benefit Allowance?

The lump sum and death benefit allowance (LSDBA) is the maximum amount that can be paid tax-free as a lump sum from your pensions — both during your lifetime and on your death. It was introduced on 6 April 2024 as part of the new framework that replaced the lifetime allowance (LTA).

The standard LSDBA is £1,073,100. This is the same figure as the old lifetime allowance, but the way it works is fundamentally different. The LTA capped the total value of your pension benefits. The LSDBA only caps tax-free lump sum payments — it does not limit how much your pension pot can be worth or how much income you can draw.

How the LSDBA Replaced the Lifetime Allowance

The lifetime allowance was abolished in April 2024 following changes announced in the 2023 Spring Budget. In its place, three new allowances were introduced:

The LSDBA is the overarching cap. Your lifetime tax-free cash lump sums (up to £268,275 via the LSA) count towards it, and any tax-free lump sum death benefits paid on your death also count towards it. The total across both cannot exceed £1,073,100.

What Counts Against the LSDBA?

The following lump sum payments use up your LSDBA:

• Pension commencement lump sums (PCLS) — the tax-free cash you take when you start drawing your pension (typically 25% of your pot)
• Uncrystallised funds pension lump sums (UFPLS) — the tax-free portion (25%) of lump sums taken from an uncrystallised pension
• Lump sum death benefits — tax-free lump sums paid to your beneficiaries on your death before age 75
• Serious ill-health lump sums — tax-free lump sums paid if you have a terminal diagnosis (before age 75)
• Trivial commutation lump sums — small pension pots cashed in as a lump sum

What Does NOT Count Against the LSDBA?

• Drawdown income — regular income taken from flexi-access drawdown does not count
• Annuity income — income from an annuity does not count
• Scheme pension income — income from a defined benefit pension does not count
• Death benefits paid as income — if beneficiaries take inherited pensions as drawdown income rather than a lump sum, the LSDBA does not apply

How the LSDBA Works on Death

When you die, your remaining LSDBA determines how much of any lump sum death benefit can be paid tax-free. The calculation works as follows:

1. Start with your full LSDBA (£1,073,100 or your protected amount)
2. Subtract any tax-free lump sums you took during your lifetime (PCLS, UFPLS tax-free portions, etc.)
3. The remaining amount is available for tax-free lump sum death benefits

Example Calculation

David has a £600,000 SIPP. During his lifetime, he took £150,000 as tax-free cash (PCLS). He dies at age 72.

• Full LSDBA: £1,073,100
• Less lifetime lump sums used: £150,000
• Remaining LSDBA available for death benefits: £923,100
• Remaining pension pot: £450,000 (assuming no growth)
• Result: the entire £450,000 can be paid as a tax-free lump sum (it is within the remaining LSDBA)

When the LSDBA Is Exceeded

If the lump sum death benefit exceeds the remaining LSDBA, the excess is taxed as income at the beneficiary's marginal rate. For example:

• Sarah has a £1.5 million SIPP and took £268,275 tax-free cash during her lifetime
• Remaining LSDBA: £1,073,100 − £268,275 = £804,825
• If beneficiaries take the full £1.5 million as a lump sum, £804,825 would be tax-free and the remaining £695,175 would be taxed at the beneficiary's marginal income tax rate

Transitional Protections

If you previously held a valid lifetime allowance protection, you may have a higher LSDBA than the standard £1,073,100. The transitional arrangements are as follows:

If you hold transitional protection, it is essential to check with your pension provider that your records are up to date. Losing protection (for example, by making new contributions when you hold Fixed Protection) could reduce your LSDBA to the standard amount.

Planning Strategies Around the LSDBA

For Those With Pensions Near or Above the LSDBA

• Direct beneficiaries to use drawdown — income through drawdown is not subject to the LSDBA, so beneficiaries can access the full pot tax-free (if death before 75) by choosing drawdown over a lump sum
• Minimise lifetime lump sums — taking less tax-free cash during your lifetime preserves more LSDBA for death benefits
• Check your protections — if you have transitional protection, ensure it remains valid and your provider has recorded it
• Consider the April 2027 IHT changes — the government has announced that inherited pensions may be brought within IHT scope from April 2027, which could affect planning strategies

For Those With Smaller Pensions

If your total pension savings are comfortably below £1,073,100, the LSDBA is unlikely to affect you or your beneficiaries. Your focus should be on completing nomination forms and ensuring your beneficiaries know about your pension arrangements.

The Lump Sum Allowance (LSA) vs the LSDBA

It is important to distinguish between the two allowances:

• The Lump Sum Allowance (LSA) of £268,275 caps the total tax-free cash you can take during your lifetime
• The LSDBA of £1,073,100 is the overall cap covering both lifetime tax-free lump sums and tax-free lump sum death benefits combined

Your lifetime tax-free cash counts against both allowances. So if you take £268,275 in tax-free cash during your lifetime, you have used your full LSA but still have £804,825 of LSDBA available for death benefits.

Next Steps

If you have a larger pension pot, understanding the LSDBA is essential for planning how your benefits will be distributed on death. Check whether you hold any transitional protections that might increase your allowance. Consider speaking to a regulated financial adviser who can model different scenarios and help you and your beneficiaries plan effectively. Get matched with a pension adviser for personalised guidance.