The lump sum and death benefit allowance caps the total tax free lump sums that can be paid out of a person’s registered pensions, both in life and on death. The standard allowance is £1,073,100. A serious ill health lump sum taken before age 75, or a lump sum death benefit paid after a death before 75, is tax free up to whatever allowance is left, and any excess is taxed as income at the recipient’s marginal rate.

What is the lump sum and death benefit allowance?

The lifetime allowance was abolished from 6 April 2024. In its place there are two limits on tax free lump sums, set out in Chapter 15A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003):

  • the lump sum allowance of £268,275, which caps the ordinary tax free cash taken in retirement (pension commencement lump sums, the 25% tax free part of an uncrystallised funds pension lump sum and stand alone lump sums), and
  • the lump sum and death benefit allowance (LSDBA) of £1,073,100 under section 637S ITEPA 2003, which is the wider ceiling.

Everything that uses the lump sum allowance also uses the LSDBA. The LSDBA then picks up two extra kinds of payment: serious ill health lump sums and most lump sum death benefits. It is a limit on tax free lump sums only. It does not restrict the size of a pension fund or the income drawn from it.

A person can have a higher allowance if they hold one of the old lifetime allowance protections. HMRC’s Pensions Tax Manual at PTM172000 lists primary protection, enhanced protection, fixed protection 2012, 2014 and 2016, and individual protection 2014 and 2016, along with enhancements for pension credits on divorce and for non UK residence or international transfers.

Which payments are tested against it?

The test happens at a “relevant benefit crystallisation event” (section 637R ITEPA 2003). For the LSDBA these are:

  • a pension commencement lump sum, a stand alone lump sum, or the tax free part of an uncrystallised funds pension lump sum
  • a serious ill health lump sum
  • a relevant lump sum death benefit, which means any authorised lump sum death benefit except a charity lump sum death benefit or a trivial commutation lump sum death benefit

GOV.UK lists the death benefits that count when the member dies under 75: uncrystallised funds, drawdown pension fund, flexi access drawdown, annuity protection, pension protection and defined benefits lump sum death benefits.

Two exclusions catch people out. First, a death benefit paid from rights that were crystallised before 6 April 2024 (for example a drawdown fund designated under the old rules) is not a relevant lump sum death benefit, so it is not tested at all (PTM173000 and PTM073010). Second, an unauthorised payment is never a relevant benefit crystallisation event; it is taxed under the unauthorised payments rules instead.

Death benefits are tested against the deceased member’s allowance, not the beneficiary’s. Anything the member used in their lifetime, and any death benefits already paid, are deducted first.

How is a serious ill health lump sum taxed?

A serious ill health lump sum lets a scheme pay out a member’s whole entitlement under an arrangement as cash. HMRC’s conditions at PTM063400 are that:

  • before paying, the scheme administrator has written evidence from a registered medical practitioner that the member is expected to live for less than one year, and
  • for payments on or after 16 September 2016, the payment extinguishes all the uncrystallised rights under that arrangement.

There is no minimum age and no cap on the amount. The tax depends on age:

  • Under 75: no income tax up to the “permitted maximum”, which is the member’s available LSDBA. Any excess is taxed as pension income at the member’s marginal rate, and the scheme deducts it under PAYE before paying.
  • 75 or over: the whole lump sum is taxed as pension income at the member’s marginal rates.

The scheme administrator must report the payment to HMRC if it exceeds the LSDBA, or if the member is, or within the previous six years was, a director of the sponsoring employer or connected with one. A failure to report can lead to penalties for the administrator.

How are lump sum death benefits taxed?

For an uncrystallised funds lump sum death benefit, PTM073200 sets out the position, and the same structure applies to the other money purchase and defined benefits death lump sums:

  • If the member died under 75 and the lump sum is paid within two years of the date the scheme administrator first knew of the death (or could reasonably have known of it, if earlier), it is tax free up to the deceased’s available LSDBA. The excess is taxed as pension income at the recipient’s marginal rate.
  • If the member died at 75 or over, or the two year window is missed, the whole lump sum is taxable.

Who receives the money also counts. If a taxable lump sum goes to a “non qualifying person”, such as a company, a trustee of a non bare trust or a personal representative acting as such, the scheme pays the special lump sum death benefits charge of 45% instead (PTM073010).

The collection mechanism differs from the ill health case. For lump sum death benefits, the pension provider does not deduct tax for an LSDBA excess. The person dealing with the estate must tell HMRC if death benefits paid to beneficiaries go over the deceased’s LSDBA, within 13 months of the death or 30 days after realising tax is owed, whichever is later. HMRC then sends each beneficiary a notice of what they owe.

How is the remaining allowance worked out?

Start with £1,073,100 (or the protected figure) and deduct every earlier relevant benefit crystallisation event. Where a member had benefit crystallisation events before 6 April 2024, transitional rules in Schedule 9 to the Finance Act 2024 apply (PTM174200):

  • The standard calculation deducts 25% of the lifetime allowance the member had already used.
  • The deduction is 100% instead if the member took a serious ill health lump sum before 6 April 2024 while under 75, or died under 75 before that date with a death benefit paid before it.
  • If the member actually took less tax free cash than the 25% assumption, they can apply for a transitional tax free amount certificate. The application must be made before the first relevant benefit crystallisation event, with evidence covering every scheme. The scheme has 3 months to consider it.

If a member does not give the scheme the information it asks for, PTM172000 says the administrator will assume there is no allowance left. On a death, executors should therefore collect statements from every scheme quickly.

What does a worked example look like?

HMRC’s own example at PTM174200: Justin died on 18 May 2024 aged 52. On 5 February 2023 he had taken a serious ill health lump sum of £800,000. Because that was a serious ill health lump sum taken under 75 before 6 April 2024, the full £800,000 is deducted, leaving £273,100 of LSDBA. He left £300,000 of uncrystallised funds in another scheme. If that is paid as a lump sum death benefit, £26,900 exceeds the allowance and is taxed at the beneficiaries’ marginal rates.

Illustration only. Maria takes a £100,000 pension commencement lump sum in 2025 and has no protection. She dies aged 70 with £1,200,000 of uncrystallised funds, all paid to her son as a lump sum within a year. Her remaining LSDBA is £973,100 (£1,073,100 less £100,000). The first £973,100 is tax free. The remaining £226,900 is added to the son’s income for the year and taxed at his rates. Her personal representatives must report the excess to HMRC.

What mistakes are common?

  • Assuming death benefits are always tax free before 75. The two year payment window and the LSDBA both apply. A slow claim can turn a tax free payment into a fully taxable one.
  • Looking at one scheme in isolation. Each scheme only sees its own payments. The allowance is personal and covers all registered schemes.
  • Executors not reporting the excess. For death benefits the reporting duty sits with the personal representatives, not the scheme.
  • Confusing income tax with inheritance tax. The LSDBA is an income tax rule. Inheritance tax is separate, and for deaths on or after 6 April 2027 most unused pension funds and death benefits are brought into the estate, as explained in our page on pensions and inheritance tax.
  • Missing the certificate deadline. A transitional tax free amount certificate cannot be applied for after the first relevant benefit crystallisation event.
  • Forgetting the age 75 cliff for ill health. A serious ill health lump sum paid at 75 or over is taxable in full, whatever allowance remains.

Lump sums that are taxed as pension income are added to the recipient’s other income for the year, so the rate depends on the bands in our 2026 to 2027 rates and thresholds summary. Where tax is deducted through PAYE on a one off payment, the recipient may be able to reclaim an overpayment, as explained in our guide to pension withdrawals and emergency tax. Beneficiaries who receive a death benefit through a trust can claim a credit for the 45% charge paid by the scheme on their own Self Assessment return or on form R40.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.