How is a pension death benefit lump sum paid and taxed?

Full answer

**Two scenarios: death before or after 75** **Death before age 75** If you die before 75 with uncrystallised pension funds (funds not yet drawn down): - Benefits can be paid as a lump sum to nominated beneficiaries - The lump sum is **income-tax-free** up to the Lump Sum Death Benefit Allowance (LSDBA) of **£1,073,100** - Amounts above the LSDBA are taxed as the recipient's income - Alternatively, funds can be passed into a beneficiary's drawdown account and taken as income (taxed when drawn) For crystallised funds already in drawdown at death before 75: the remaining funds can also be passed to beneficiaries free of income tax (as lump sum or drawdown). **Death after age 75** If you die at or after 75: - All death benefit payments (lump sum or drawdown income) are taxed as the recipient's income at their marginal rate - No income-tax-free element **Expression of wishes** Pension funds sit outside your estate for inheritance tax purposes (currently — though Budget 2024 announced IHT on pensions from April 2027; confirm current law). Trustees are not legally bound by your nominated beneficiaries but should follow them absent exceptional circumstances. **Example: James dies at 68 with £800,000 in drawdown** James has expressed wishes for his daughter Sarah to receive the funds. - Below LSDBA (£1,073,100): entire £800,000 can be paid as lump sum income-tax-free to Sarah - Or placed in Sarah's drawdown: she pays income tax when she withdraws, at her marginal rate (potentially lower) - No IHT (currently, under pre-2027 rules) **Spousal bypass trusts** Some people use a spousal bypass trust (a discretionary trust nominated to receive pension death benefits) to prevent pension funds flowing directly into the surviving spouse's estate and becoming subject to IHT on the second death.

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