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pension lump sum

New Pension Lump Sum and Death Benefit Allowance
-    Draft legislation will impact beneficiaries of death benefits that choose income

It was a very welcome surprise when the Chancellor announced in this years Spring Budget that the pension savings lifetime allowance would be abolished.

While it has been retained for the 2023/24 tax year, the draft legislation to take effect from 6 April 2024, has now been published which irons out the intricacies of this significant change.

With the lifetime allowance abolished, it wasn’t clear how taxes would be collected on lump sums and death benefits in its absence.  We now know this will be achieved by introducing a new lump sum and death benefit allowance, which, surprise surprise, is the same amount as the old lifetime allowance – £1,073,100.

If the draft legislation is enacted, the most significant changes will be in the way death benefits are taxed when a pension saver dies before age 75.

Death benefits – lump sum

A beneficiary can generally receive lump sum death benefits tax free if the pension hasn’t been accessed by the deceased (uncrystallised).
  • Previously, any excess over the lifetime allowance was taxed at the rate of 55%.
  • From 2024/25, the excess over the new lump sum and death benefit allowance will be taxed at the beneficiary’s marginal rate of tax. 

This is as intended when the changes were announced.

Death benefits – Income

What was not announced alongside the initial abolition news is the proposed approach to taxing uncrystallised death benefits taken as income – either by drawdown or an annuity. 

Previously, the pension income was exempt from tax. From 2024/25, the proposed legislation will see pension income taxed in full at the beneficiary’s marginal rate of tax.

The new rules are broadly neutral if a pension saver dies after reaching age 75, but the tax treatment could be potentially worse from 6 April 2024 for those that die younger.

Given the more advantageous tax treatment if uncrystallised funds are taken as a lump sum (completely exempt if less than the new lump sum and death benefit allowance), this could push more beneficiaries into taking a lump sum even where income would be more suitable for their needs.

If you require advice on how these changes effect you or the future beneficiaries of your estate please contact us.