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Post by mostlywrong on Sept 21, 2024 15:05:38 GMT
Thanks, Bracknellboy.
I refer you back to my earlier snip of the gov.uk website:
/snip
Generally, you can take a tax-free lump sum from your pension of 25% of your pension pot, up to a maximum across all your arrangements of £268,275. This is your lump sum allowance.
Under certain circumstances, either:
you can also receive a serious ill-health lump sum
your beneficiaries can receive a lump sum death benefit
Both are tax-free up to a maximum of £1,073,100. This is your lump sum and death benefit allowance.
Any tax-free lump sums and lump sum death benefits will count towards your overall limit of £1,073,100.
/snip
The problem is that this is, to my eyes, badly written because it appears to conflate "lump sum allowance" and "lump sum and death benefit allowance".
Your earlier explanation reinforced my view of the way that "(pension) lump sum allowance" is treated for tax purposes.
I get that bit (I think).
I hoped that you would also be able to explain the "death benefit allowance" bit. 
I think that the Treasury has found a way of taxing the death benefits of a pension. I recall that, in the small print of my company pension, was a paragraph to say that if I died before drawing my pension that my relatives would receive £x. Maybe, the rules up to last April meant that someone dying whilst working passed their whole pension to their relatives without any tax???
And maybe the Treasury has worked out how to stop that??
I am just thinking aloud because I discuss pensions with a couple of high earners (at least to me...) and I do try to stay ahead of the game!
MW
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Post by bracknellboy on Sept 21, 2024 15:39:54 GMT
Thanks, Bracknellboy.
I refer you back to my earlier snip of the gov.uk website:
/snip
Generally, you can take a tax-free lump sum from your pension of 25% of your pension pot, up to a maximum across all your arrangements of £268,275. This is your lump sum allowance.
Under certain circumstances, either:
you can also receive a serious ill-health lump sum
your beneficiaries can receive a lump sum death benefit
Both are tax-free up to a maximum of £1,073,100. This is your lump sum and death benefit allowance.
Any tax-free lump sums and lump sum death benefits will count towards your overall limit of £1,073,100.
/snip
The problem is that this is, to my eyes, badly written because it appears to conflate "lump sum allowance" and "lump sum and death benefit allowance".
Your earlier explanation reinforced my view of the way that "(pension) lump sum allowance" is treated for tax purposes.
I get that bit (I think).
I hoped that you would also be able to explain the "death benefit allowance" bit.
I think that the Treasury has found a way of taxing the death benefits of a pension. I recall that, in the small print of my company pension, was a paragraph to say that if I died before drawing my pension that my relatives would receive £x. Maybe, the rules up to last April meant that someone dying whilst working passed their whole pension to their relatives without any tax???
And maybe the Treasury has worked out how to stop that??
I am just thinking aloud because I discuss pensions with a couple of high earners (at least to me...) and I do try to stay ahead of the game!
MW
this is a completely novel area for me so I'm just working from "first principles" so to speak. However, I don't think it is conflating the two per se. On reading it my take is that there is a separate LSDBA which is, again, based on the old LTA (or your personal LTA based on transitional arrangements). The LSDBA is effectively set at the 100% value of the old LTA, whereas the LSA is set at 25%. In effect, it seems to me that the LSDBA is essentially a Death Benefit Allowance, but decreased by anything that you took as a lump sum while you were alive. Hence it being LSDBA So LSDBA is 4x the LSA. While you are alive, you use up 50% of your LSA. Then you keel over. Your surviving beneficiary/spouse whatever the regs are, can still take a death benefit tax free, but their available tax free allowance is now reduced to 87.5% of the applicable LSDBA because 12.5% of it (50% of 25%) was already used up by the pensioner during their lifetime in the form of lump sum withdrawals. If they had taken nothing, then the limit is 100% of the LSDBA, and if they had taken all of their LSA, then the DB tax free amount is 75% of the LSDBA. Anything over that is then liable for tax. I surmise that nothing has changed from the days when the LTA was in place, and death benefits were always subject to potential tax if they were over certain limits. And that these rules simply mirror what was there before, but have introduced the new terminology of LSA and LSDBA because you can no longer write rules based on LTA limits that no longer exist. However, as I say, this is just conjecture/logic on my part as its not something I've previously had reason to be interested in.
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daveb
Member of DD Central
Posts: 253
Likes: 210
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Post by daveb on Sept 21, 2024 17:04:26 GMT
MoneyBox on R4 today mentioned the possibility of further limiting (probably not abolishing) the tax free lump sum. They also mentioned that the current arrangement whereby unused pension savings are outside the estate for inheritance tax could change, they said it would raise little at first but would bring in quite a lot over time.
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Post by mostlywrong on Sept 21, 2024 17:32:03 GMT
Bracknellboy,
Thank you for that. I think you are probably correct.
I will take your example and work through it in slow time.
'Cos my brain cannot cope with all of this...
MW
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