Tax Impacts: Lump Sum Death Benefits allowance
(5 min read)
For current colleagues, the life assurance, which forms part of your overall Marsh McLennan benefits package, provides additional financial security for your family and other dependants should you pass away whilst employed by the Company. The Lump Sum Death Benefits Allowance (LSDBA) could affect your death in service benefits. The LSDBA is a limit set by HM Revenue & Customs (HMRC) on the amount of benefits that can be paid through a Registered arrangement without triggering a tax charge. The LSDBA is currently set at £1,073,100 and benefit above this would be taxed at the beneficiary’s marginal rate.
For more detail on how you may be impacted by this please find further resources below:
LUMP SUM DEATH BENEFITS ALLOWANCE – POTENTIAL TAX IMPACT
The LSDBA is a limit set by HM Revenue & Customs (HMRC) on the amount of benefit that can be paid through a Registered arrangement without triggering a tax charge. The LSDBA is currently set at £1,073,100 and benefit above this would be taxed at the beneficiary’s marginal rate.
For the purposes of the LSDBA charge calculation, on death your lump sum life assurance benefit would be included as well as any other lump sum benefits that would be payable from a Registered arrangement, such as the return of your Defined Contribution (DC) account from the MMC UK Pension Fund, as well as any other DC accounts you may have such as from any previous employment.
MMC’s default approach to managing the death in service benefits is to provide any lump sum life assurance benefit above £500,000 through a ‘non-registered or Excepted’ arrangement, benefits from which do not count towards the LSDBA. Two examples of how the LSDBA would apply based on MMC’s default approach are as follows:
Example 1: Salary – £60,000
| MMC Life Assurance benefit, as selected in Prosper: | MMC Pension Fund DC account: | DC account from previous employment: | Total benefit payable in the event of death: |
| £1,080,000 (18 x salary) | + £120,000 | + £50,000 | = £1,250,000 |
| Total benefit for LSDBA purposes: | £670,000* | ||
| Benefit exposed to LSDBA charge: | £nil | ||
Example 2: Salary – £180,000
| MMC Life Assurance benefit, as selected in Prosper: | MMC Pension Fund DC account: | DC account from previous employment: | Total benefit payable in the event of death: |
| £2,880,000 (16 x salary) | + £500,000 | + £150,000 | = £3,530,000 |
| Total benefit for LSDBA purposes: | £1,150,000* | ||
| Benefit exposed to LSDBA charge: | £76,900 | ||
* £500,000 MMC Life Assurance benefit cap for registered benefit, plus MMC UK Pension Fund DC Account Value, plus DC account from previous employment.
For the avoidance of doubt, in the event of death, benefits through membership of MMC’s Defined Benefit (DB) arrangements are paid as pension income to beneficiaries rather than lump sums and do not count towards the LSDBA calculation.
If the default approach does not work for you then you can request to have all of your lump sum life assurance benefit provided via the Excepted/non-registered arrangement. Completion of a form is required to make the request; this can be found on our Forms section at the bottom of this page. If you are unsure of the approach you should take, you should take advice from an independent financial advisor. You can also contact the Mercer Private Wealth team here.
There are some circumstances where UK inheritance tax could be payable on benefits provided via a non-registered arrangement. Based on inheritance tax rates, law and HMRC confirmations applicable to deaths occurring prior to 1 April 2024 this tax charge would not be more than 6% of the lump sum death benefit paid. If any such UK inheritance tax were payable, it would be deducted from the lump sum benefit at or before the time of payment.
COLLEAGUES WITH HMRC PROTECTION / WHO HAVE OPTED OUT OF THE MMC UK PENSION FUND DUE TO PENSION SAVINGS TAX LIMITS
If you have been granted any form of HMRC protected tax-free cash (formerly Lifetime Allowance protection), such as Fixed Protection, and have already informed the MMC Benefits Team then no action is required. All lump sum life assurance benefits are automatically insured via MMC’s Excepted/non-registered arrangement if you have opted out of the MMC UK Pension Fund for pension savings tax reasons and currently receive a Non Pensionable salary Supplement (NPSS).
If you have not previously informed MMC that you have HMRC protection then you should do so immediately. Please send a copy of your HMRC protection certificate to UKIBenefits@mmc.com.
Should you wish to elect to have all your life assurance provided through the Excepted/non-registered arrangement, please complete and return the application form.
For any further questions, please click here to access FAQs or contact UKIBenefits@mmc.com.
First published May 2024