The LTA is no more: what does that mean for your pension death benefits?

The UK government has scrapped the lifetime limit on what you can pay into your pension. But what happens next? If you’re leaving your pension to someone after you die, here are some important questions we’ve been helping clients answer.

No limits?

The pensions lifetime allowance (LTA) was abolished in April this year, removing the limit on the total amount people can pay in during their lifetime.

This is good news for anyone who’d previously reached their limit because it means they can start to make pension contributions again. This is not only good for your pension pot, but it can also help to reduce your tax liabilities and potentially enhance a tax-efficient legacy for your beneficiaries.

However, the end of the LTA doesn’t eliminate the need for careful planning. With the introduction of new pension rules, it’s crucial to understand the changes and ensure your pension arrangements are structured correctly to maximise their value for you and your loved ones.

The LTA is dead, long live the LSDBA

Here we’re focusing on pension death benefits, specifically the Lump Sum and Death Benefit Allowance (LSDBA). The LSDBA is an important as it has the potential to cause people to make mistakes that could cost their heirs significant sums in income tax and inheritance tax.

So, what’s changed? The LSDBA is the maximum amount that can be left to your beneficiaries tax-free if you pass away before the age of 75. This amount is set at £1,073,000, which is the same level as the previous Lifetime Allowance (LTA). It will be reduced by any Lump Sum Allowance (LSA) formerly known as ‘tax-free lump sums,’ utilised during your lifetime.

It’s something we’ve been speaking to clients about a lot. If you’re wondering if this affects you, these are the points worth considering:

Which taxes do we need to consider?

By correctly structuring your pension arrangements you can provide your beneficiaries with the potential to significantly reduce their income tax liabilities as well as retaining the valuable pension wrapper which is exempt form inheritance tax.

Does it make a difference what age you die?

Yes. If you die before age 75, any beneficiaries will receive payments free of income tax – irrespective of whether it’s a lump sum, or drawdown pension. This is the case whether the money is crystallised (the parts of your pension you’ve already accessed via drawdown or buying an annuity) or uncrystallised (pension savings you haven’t accessed yet).

If you’re over 75 when you die, your beneficiaries would be liable to income tax at their marginal rate on any lump sums they receive.

Does your pension provider offer drawdown?

Many modern pension schemes offer flexible retirement income – or pension drawdown – as it allows you to withdraw from your scheme, while allowing your pension fund to keep growing. It also enables you to keep the value of your pension scheme outside your estate – which is key when it comes to inheritance tax. If your pension funds are in drawdown when you pass away your beneficiaries won’t have to pay income tax on it.

However, many older schemes that were set up before the government introduced ‘pension freedoms’ in 2015 don’t have the ability to offer drawdown. This limits the options for your beneficiaries on death.

Below is an example, where the beneficiary of a £500,000 pension fund that doesn’t allow nominee drawdown, could be liable for over £218,000 in income tax if the holder died after reaching age 75. On the other hand, if the fund did allow drawdown, the beneficiary could avoid paying any income tax at all.

(Please note that we’re using English tax rates in our examples – income tax liabilities will be different in Scotland.)

Mr Smith has a personal pension of £500,000. He has taken no pension benefits previously. Mrs Smith is named as the 100% nominated beneficiary.

Their estate is already valued in excess of the transferable nil rate band and main residence nil rate band for inheritance tax purposes.

Mrs Smith has existing income of £20,000 per annum and does not require any additional income or capital at this time.

Scenario 1: pension fund DOESN’T allow nominee drawdown
If Mr Smith dies before age 75…	… Mrs Smith receives a tax-free lump sum payment of £500,000	LSDBA Income Tax due Estate value increase 2nd death IHT Liability	£500,000 £0 £500,000 £200,000
If Mr Smith dies after age 75…	… Mrs Smith receives a taxable lump sum payment of £500,000	LSDBA Additional Income Tax due Estate value increase 2nd death IHT Liability	N/A £218,719 £281,281 £112,512
Scenario 2: pension fund DOES allow nominee drawdown
If Mr Smith dies before 75…	… Mrs Smith can request the whole fund be designated to nominee drawdown, complete a new expression of wish form.	LSDBA Designate to drawdown Income Tax due	£500,000 £500,000 £0
If Mr Smith dies after age 75	…Mrs Smith can request the whole fund be designated to nominee drawdown and complete a new expression of wish form.	LSDBA Designate to drawdown Income Tax due	N/A £500,000 £0

Have you nominated who will receive your pension?

If your plan doesn’t offer drawdown, the only option for your family might be to receive a lump sum as already explained. However it’s also important to make sure you have the nomination forms completed correctly to ensure your pension wealth is passed down to the next generation as efficiently as possible.

Nominee drawdown can only be made available to those whom you have nominated as beneficiaries of your plan.  Without this the benefits will automatically be paid as a lump sum.  Not only could this lead to the beneficiary being liable to income tax on the lump sum payment, it also takes the fund out of the inheritance tax friendly pension wrapper.  We can help you fill out and consider expression of wish or nomination forms.

In the example we look at below we can see how by having a plan that offer nominee drawdown with a correctly completed expression of wish form could save over £675,000 of income tax and save the estate nearly £430,000 of inheritance tax.

Mr Jones has a personal pension of £1.5 million and has taken no benefits previously. Mrs Jones is the 100% nominated beneficiary. She also has income of £50,000 per annum.

Their estate is already valued in excess of the transferable nil rate band and main residence nil rate band for inheritance tax purposes.

Mrs Jones does not require any additional income or capital at this time.

Scenario 1: pension fund DOESN’T allow nominee drawdown
If Mr Jones dies before age 75…	… Mrs Jones receives a lump sum payment	LSDBA Excess Income Tax due Estate value increase 2nd death IHT Liability	£1,073,100 £426,900 £193,323.80 £1,306,676 £429,240
If Mr Jones dies after age 75…	… Mrs Jones receives a lump sum payment	LSDBA Income Tax due Estate value increase 2nd Death IHT Liability	N/A £676,219 £823,781  £329,512
Scenario 2: pension fund DOES allow nominee drawdown
If Mr Jones dies before age 75…	…Mrs Jones can request the whole fund be designated to nominee drawdown and complete a new expression of wish form.	Designate to drawdown Income Tax due Estate value increase 2nd Death IHT Liability	£1,500,000 £0 £0 £0
If Mr Jones dies after age 75…	… Mrs Jones can request the whole fund be designated to nominee drawdown and complete a new expression of wish form.	LSDBA Designate to drawdown Income Tax due Estate value increase 2nd Death IHT Liability	N/A £1,500,000 £0 £0 £0

Does your pension have protection?

Enhanced protection was brought in when the LTA was first introduced in 2006, offering full protection against tax charges (as long as other contributions or other benefits had ceased). In many cases this protection will still apply.

For example, someone with a personal pension of £10 million with enhanced protection in place would still see some or all this protected when passing this wealth on. If you have enhanced or fixed protection (which maintained the LTA at a fixed level, depending on when it was put in place), you should check the scheme to ensure it’s still suitable for your needs to make sure you can take advantage of the new legislation.

Below we look at an example of a client with a significant pension fund who hold Enhanced Protection.

Mrs Brown has a personal pension of £10 million, with no benefits taken previously. She has Enhanced Protection in place and the fund value of 5 April 2024 was £9 million. Mr Brown is the nominated beneficiary and has other income of £125,000 per annum.

Their estate is already valued in excess of the transferable nil rate band and main residence nil rate band for inheritance tax purposes.

Mr Brown does not require any additional income or capital at this time.

Scenario 1: pension fund DOESN’T allow nominee drawdown
If Mrs Brown dies before age 75…	…Mr Brown receives a lump sum payment of £10,000,000.	LSDBA Excess Income Tax due Estate value increase 2nd death IHT Liability	£9,000,000 £1,000,000 £450,000 £9,550,000 £3,820,000
If Mrs Brown dies after age 75…	…Mr Brown receives a lump sum payment of £10,000,000.	LSDBA Income Tax due Estate value increase 2nd Death IHT Liability	N/A £4,500,114 £5,499,886 £2,199,954
Scenario 2: pension fund DOES allow nominee drawdown
If Mrs Brown dies before age 75…	…Mr Brown can request the whole fund be designated to nominee drawdown and complete a new expression of wish form.	LSDBA Designate to drawdown Income Tax due Estate value increase 2nd Death IHT Liability	N/A £10,000,000 £0 £0 £0
If Mrs Brown dies after age 75…	…Mr Brown can request the whole fund be designated to nominee drawdown and complete a new expression of wish form.	LSDBA Designate to drawdown Income Tax due Estate value increase 2nd Death IHT Liability	N/A £10,000,000 £0 £0 £0

What to do next

When did you last check on your pension? If it hasn’t been reviewed in the last 12 months, then these issues we’ve discussed here are definitely points worth considering. Our advisers are already working with clients helping them make sense of what these changes mean for them and supporting them in making their affairs as efficient as possible.

Want to know more? Get in touch today.