New Pensions death benefit allowance - Are employees at risk of breaching their new pension lump sum death benefit allowance (LSDBA) because of their Death in Service benefits at work?
The lump sum death benefit allowance (LSDBA), effective from 6 April 2024, is the maximum death benefit your beneficiaries can receive before any tax is due. This figure is set at £1,073,100 unless you have any prior fixed or individual protection in place.
Many company group life assurance plans are classed as registered group life schemes, due to being written under pension schemes legislation. As a result of this, any lump sum benefits paid could be counted towards an individual’s LSDBA, if death occurs while they are still in employment.
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.
Is there a solution? There is, but awareness is the key here. You need to ensure the death benefits for the member are classed as an excepted group life policy, so that any lump benefits do not count towards the LSDBA.
While the tax charge applicable where Death in Service benefits exceed the LSDBA is lower than that the previous Lifetime Allowance charge of 55%, it could still be significant – potentially up to 45% (48% in Scotland), depending on the recipient’s personal tax position*.
*In March 2024 the UK government announced that it will abolish the lifetime allowance. As a result, from 6th April 2024, the lifetime allowance charge will be removed. It’s important to remember navigating financial decisions is a complex journey, and individual circumstances play a pivotal role. The information provided is for general use, please consult a qualified financial adviser for specific guidance tailored to your situation.
Tax treatment varies according to individual circumstances and is subject to change.
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