Enhanced Protection, LSDBA, uncrystallised and crystallised funds, death pre 75

Rebtix

Hello,

We are dealing with the SIPP of a deceased client (pre 75) who held Enhanced Protection and a mix of uncrystallised and crystallised funds. The crystallised funds are a combination of flexi-access drawdown and capped drawdown.

Am I correct in thinking that the LSDBA is the value of the uncrystallised funds as at 5th April 2024 and these can be paid to beneficiaries as a tax-free lump sum (because the client died pre age 75)? Any excess (i.e. the crystallised fund) is taxed at beneficiary's marginal rate?

And, benefits can be paid as a beneficiary drawdown pension tax free, regardless of whether uncrystallised or crystallised?

The client died in the last tax year but the SIPP provider has said the new rules would apply - can I just sense check that with you all too?

Thanks

les_cameron

You are mostly correct.

Yes the LSDBA is the value of uncrystallised rights as at 5th April 2024.
Lump Sum Death benefits from uncrystallised rights up to the LSDBA can be paid as lump sums tax free - excess is beneficiary marginal rate.

Rights that were crystallised before 6 April 2024 do not use up LSDBA and should also not have a limit so payable tax free. But this is one of the bits of the law they messed that is not fixed yet (pesky election got in the way) so if they are over available LSDBA they are theoretically taxable.

Any benefits used for drawdown as long as they are set up within 2 years of the scheme becoming aware of the death can be paid out tax free (Even the full amount the following day which is a way of avoiding the technical flaw in the law)

I agree with the SIPP provider.

https://www.mandg.com/wealth/adviser-services/tech-matters/pensions/benefit-limits/lump-sum-and-death-benefit-allowance

Rebtix

Thanks Les, that's very helpful.
So if the beneficiary took the full amount via income drawdown that would get round the technical flaw? Apologies, I'm not sure I'm clear on what is meant by the full amount the following day.

les_cameron

Yes.

An example. You have a death pre 75 less than 2 years with a £2,073,100 fund. If taken as a lump sum then you have a £1m excess which would be taxed at marginal rate. If you put it into beneficiary drawdown then the following day you could take the full amount as an income payment and it would be tax free.

Money that goes into drawdown doesn't interact with LSDBA so going drawdown first then full income avoids the current flaw.

Rebtix

Great. Thanks again for your help.