Death in Service: How to Avoid Tax Charges on Your Beneficiaries

If the employee’s combined pension and death in service values exceed their LSDBA value, this could lead to their beneficiaries facing income tax charges and receiving less than the employee thought they would get.

This can be demonstrated via an example for a plan that provides Death in Service cover of four times basic salary. If an employee subject to the standard LSDBA earns £125,000, the policy will pay £500,000 on death in employment. If their pension pot is £800,000 then beneficiaries will face an income tax charge on the amount in excess of the £573,100 of their LSDBA remaining — in this case £226,900. This would end up with the beneficiary receiving substantially less than expected.  
Furthermore, an individual with a form of protection —such as fixed protection 2016 at £1.25m — could have their protection revoked if they become a member of a new registered Death in Service scheme or if their benefits within an existing policy change – e.g. four times salary increases to five times salary. This is a danger if any premiums are classed as pension contributions.