Following the removal of the Lifetime Allowance (LTA), tax free lump sums from pensions are now limited by the Lump Sum Allowance (LSA) along with the Lump Sum Death Benefit Allowance (LSDBA).
The LSDBA caps aggregate lump sums that can be paid tax-free during an individual's lifetime and on death and is set to £1,073,100.
The LSDBA may be higher if the individual has transitional protection. An individual's remaining LSDBA may be lower if they have already taken benefits.
Lump sums over the Lump Sum Death Benefit Allowance are taxed at the beneficiary's marginal rate.
Lump sums which use up LSA also reduce the available LSDBA.
The LSDBA only tests lump sums. Death benefits paid as a pension e.g. beneficiary drawdown are not tested against the LSDBA.
Lump sum death benefits paid after age 75 are not tested against the LSDBA.
How is the Lump Sum Death Benefit Allowance applied in the software?
The software continues to model the LTA in 2022 and earlier years but will show the new regime for 2023 onwards.
The Lump Sum Death Benefit Allowance will default to £1,073,100. The LSDBA is assumed to stay level in the software in accordance with current legislation.
After the start date of the plan, when a lump sum withdrawal is made from a money purchase pension, a lump sum taken from a final salary pension, or lump sum death benefits paid from a pension prior to age 75, the lump sum will be assessed against the remaining Lump Sum Death Benefit Allowance for that year.
Lump sums paid after age 75 will not be assessed against the LSDBA.
Tip - if lump sums have been taken prior to the start date of the plan, or if the client has transitional protection, details of the remaining Lump Sum Death Benefit Allowance should be recorded in Carryover Assumptions (see below) so that the software can apply the correct LSDBA for the client.
Lifetime lump sums
For lifetime lump sums, details of how much of the LSDBA is used when lump sums are taken is not specifically shown in Year View, but it is recorded in the background.
Death benefits paid as income
By default in the software, money purchase pensions move to beneficiary drawdown on death. Pension benefits being designated for beneficiary drawdown are not assessed against the LSDBA. The full amount of the deceased's pension will be transferred to an inherited pension for the beneficiary, with no test against the LSDBA.
Dependant's pensions from final salary pensions are not tested against the LSDBA.
Death benefits paid as a lump sum
For money purchase pensions, if the Beneficiaries screen has been edited to change the death benefit to Lump Sum, the pension will pay out a cash lump sum to the beneficiary.
For final salary pensions, if a Lump Sum Benefit has been input under Death in Deferment Benefits, this will pay out a cash lump sum to the beneficiary if mortality occurs prior to the pension commencing payment.
If mortality occurs prior to age 75, the death benefit lump sum will be tested against the LSDBA. If the lump sum exceeds the remaining LSDBA, the excess will be taxed at the beneficiary's marginal rate.
Deatils of how much of the death benefit is tax free and how much taxable can be seen in Year View > Pensions for the year of mortality by clicking on Death Benefit Lump Sum:
The amount of the taxable lump sum will be added to the beneficiary's other income (if the spouse/partner is in the plan) and taxed as part of the end of year tax calculation. This can be seen in Year View > Taxes in Employment and Other Income:
If mortality occurs after age 75, the lump sum will be not be tested against the LSDBA. This can be seen in Year View > Pensions by clicking on Lump Sum:
The full amount of the lump sum will be added to the beneficary's other income (if the spouse/partner is in the plan) and taxed at the beneficiary's marginal rate. This can be seen in Year View > Taxes in Employment and Other Income:
How to model that a client has already used part of their Lump Sum Death Benefit Allowance and/or has protected LSDBA
With no transitional protection
If the client has a already used part of their Lump Sum Death Benefit Allowance prior to the start date of the plan, and does not have transitional protection, this can be modelled by recording the amount of LSDBA the client has left at the start of the plan in Carryover Assumptions > Pension Allowance & Carry Forward > Remaining LSDBA.
Using the standard calculation, normally 25% of the LTA used by benefits taken before 6 April 2024 is deducted from the LSDBA. For example, if the client had used 40% of their LTA, the amount to be deducted is 0.25 x 0.4 x £1,073,100 = £107,310. Remaining LSDBA is therefore £1,073,100 - £107,310 = £965,790.
It is the remaining LSDBA which is input in Carryover Assumptions:
Tip - At present the Remaining LSDBA field is only visible if protection is selected, so as an interim work-around, select a protection type and input the remaining LSDBA. If you do not see the Remaining LSDBA field in Carryover Assumptions even when a protection type is selected, check the start date of the plan. Plans starting in 2022 or earlier will show the LTA Used field instead.
With transitional tax-free amount certificate (TTFAC)
Transitional rules provide for an alternative calculation that can increase the remaining LSDBA compared to the standard calculation e.g. where pension benefits were taken with no tax free cash prior to 6 April 2024.
The software doesn't specifically model the transitional rules. If a client has a TTFAC, you would input the remaining LSDBA in Carryover Assumptions in the same way as clients with no protection.
With transitional protection
Pension protection is still relevant for the purposes of calculating the individual's LSA and LSDBA.
If the client has transitional protection, this can be modelled by recording which type of protection the individual has and the amount of their protected LSDBA they have left at the start of the plan in Carryover Assumptions > Pension Allowance & Carry Forward > Remaining LSDBA.
Note - the software does not record what the individual's protected LSDBA was originally under transitional protection, only what remains of their LSDBA as at the start date of the Voyant plan.