Lump Sum and Death Benefit Allowance (LSDBA)

MallyGirl

Hi
I am hoping someone can help with my understanding of this allowance. I have tried reading around but all that I can find is pension related and I am interested in life assurance.
This year both mine and OH's employers have drawn our attention to the impact of this allowance with respect to our life assurance benefits which are through trusts (so not in our estate / liable for IHT). I know it is a first world problem and only relevant while still working which won't be for long now (fingers crossed).
OH is likely to hit the LSA - he previously crystallised a chunk of pension to avoid hitting the LTA. His employer offers 4x salary life assurance with cheap options to increase to 10x which he has previously done (meaning a death benefit to me of over £1m).
This year the application form says:
If you have increased your cover then the increased portion of your cover will be subject to the LSDBA and any lump sums above this allowance will be subject to income tax at the beneficiaries marginal rate.

Mine didn't mention the increase clause and just implied that the whole thing was subject to the LSDBA but I earn less so maybe not such an issue.

Do we only worry about the increase from 4x to 10x so 6x salary?
If so then does his 6x pay out stand alone or does it get combined with my 25% PCLS with tax only liable if the sum of the two is greater than £1,073,000?
If 6x then all is well. If it is the 10x figure that is used then life becomes taxing.
TIA

Marcon

MallyGirl said:

Hi
I am hoping someone can help with my understanding of this allowance. I have tried reading around but all that I can find is pension related and I am interested in life assurance.
This year both mine and OH's employers have drawn our attention to the impact of this allowance with respect to our life assurance benefits which are through trusts (so not in our estate / liable for IHT). I know it is a first world problem and only relevant while still working which won't be for long now (fingers crossed).
OH is likely to hit the LSA - he previously crystallised a chunk of pension to avoid hitting the LTA. His employer offers 4x salary life assurance with cheap options to increase to 10x which he has previously done (meaning a death benefit to me of over £1m).
This year the application form says:
If you have increased your cover then the increased portion of your cover will be subject to the LSDBA and any lump sums above this allowance will be subject to income tax at the beneficiaries marginal rate.

Mine didn't mention the increase clause and just implied that the whole thing was subject to the LSDBA but I earn less so maybe not such an issue.

Do we only worry about the increase from 4x to 10x so 6x salary?
If so then does his 6x pay out stand alone or does it get combined with my 25% PCLS with tax only liable if the sum of the two is greater than £1,073,000?
If 6x then all is well. If it is the 10x figure that is used then life becomes taxing.
TIA

Just checking...are these both 'registered' life schemes (sounds as if they are), or 'excepted' life schemes? Given the amounts which could be involved where people can opt for 10x cover, might be time for a chat with the employer to ask about setting up an excepted life scheme if they've not got one already.

MallyGirl

It says that the default cover is via an Excepted Group Life Policy - I guess that might be why only the increase comes into play?

DRS1

If so then does his 6x pay out stand alone or does it get combined with my 25% PCLS with tax only liable if the sum of the two is greater than £1,073,000?

Surely your TFLS would be irrelevant.  But his would be taken into account.

Marcon

MallyGirl said:

It says that the default cover is via an Excepted Group Life Policy - I guess that might be why only the increase comes into play?

Yes. Death benefits provided via an excepted life policy come under different legislation so don't count towards the LSBDA. 

If you're on a lower salary, that could be why your employer offers you cover via a registered life scheme (so called because it is 'registered' with HMRC and comes under pensions legislation.

MallyGirl

DRS1 said:

If so then does his 6x pay out stand alone or does it get combined with my 25% PCLS with tax only liable if the sum of the two is greater than £1,073,000?

Surely your TFLS would be irrelevant.  But his would be taken into account.

It is confusing since the income tax would be at my rate but maybe the allowances are all his. Hopefully it is all a non issue as we will retire in the next year or so and life long and happy lives.

DRS1

I must admit I am not clear why they have lumped together the TFLS and the lump sum death benefit in this LSDBA.  I think of them as two completely different things but I guess just completely doing away with the LTA would have been too simple.