Glossary · UK
What is Pension Death Benefit Lump Sum?
A lump sum paid from an uncrystallised pension fund to nominated beneficiaries when the member dies, with favourable tax treatment if the member was under age 75.
Full Definition
When a pension member dies before age 75 with funds remaining in an uncrystallised pension pot (i.e. not yet taken as income or lump sum), those funds can be paid to nominated beneficiaries as a lump sum known as a pension death benefit lump sum -- or used to provide a beneficiary's drawdown account or annuity. If the member dies before age 75, these benefits can be paid completely free of income tax to the beneficiaries, provided the pension scheme administrator designates the funds within two years of being notified of the death. If the two-year window is missed, the lump sum becomes subject to income tax at the recipient's marginal rate. If the member dies aged 75 or over, all death benefits -- whether taken as a lump sum or drawdown income -- are taxed as the beneficiary's income in the year they receive it. In 2023, the Lifetime Allowance (LTA) was abolished for 2024/25 onward, but a new Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100 was introduced, capping the total tax-free lump sums (including PCLS) payable in a lifetime. Any death benefit above the LSDBA will be taxed as income. Nominations are not legally binding on pension trustees, but trustees will give strong weight to an up-to-date expression of wishes form. Pension funds held within a discretionary trust structure fall outside the estate for Inheritance Tax purposes -- a major advantage of pension planning.