Serious ill-health lump sums and the LSDBA

A serious ill-health lump sum is paid when a member is expected to live for less than a year. It usually comes at a very difficult time for the member and their family, and the tax position is one thing that can be set out clearly. This page covers the conditions, which allowance the payment uses, how it is taxed before and after age 75, and what happens to any amount above the allowance, with one worked example computed by the engine.

What a serious ill-health lump sum is

A registered pension scheme can pay a member their uncrystallised benefits under an arrangement as a single lump sum where two conditions are met (Finance Act 2004 Schedule 29 paragraph 4). First, before the payment is made the scheme administrator must have received evidence from a registered medical practitioner that the member is expected to live for less than one year. Second, the payment must extinguish the member's uncrystallised rights under the arrangement: all of them, if nothing has been taken from it before, or the whole of what is left uncrystallised, if some benefits have already been taken.

HMRC's guidance adds that there is no minimum age, and that a registered medical practitioner means a doctor fully registered under the Medical Act 1983 (for a member overseas, an equivalent overseas qualification may be accepted). There is no limit on the size of the payment itself: for a money purchase arrangement it is the funds held, and for a defined benefits arrangement the scheme attributes a capital value to the pension being given up. The allowance decides how much of it is tax-free, not how much can be paid (PTM063400).

FA 2004 Sch 29 para 4 · PTM063400

It uses the LSDBA, not the LSA

Since 6 April 2024 two allowances have limited tax-free lump sums: the lump sum allowance (£268,275 as standard) and the lump sum and death benefit allowance (£1,073,100 as standard). A serious ill-health lump sum is tested against the LSDBA only. The lump sum allowance is used by a pension commencement lump sum and the tax-free part of an uncrystallised funds pension lump sum; a serious ill-health lump sum is not on that list (ITEPA 2003 ss.637Q and 637S; PTM173000). Tax-free cash taken earlier does reduce the LSDBA, though, because it uses both allowances. How the two fit together is in LSA vs LSDBA, and the LSDBA itself, including the transitional figures for members who crystallised benefits before April 2024, is in the LSDBA explainer.

ITEPA 2003 s.637Q · s.637S · PTM172000 · PTM173000

How it is taxed before and after 75

Before 75. No income tax is due on a serious ill-health lump sum paid to a member under 75, as long as it does not exceed the permitted maximum: the amount of the member's lump sum and death benefit allowance still available when they become entitled to it. The part above that amount is taxed as the member's pension income, at their marginal rate, in the year it is paid (ITEPA 2003 s.637C(2)–(3)).

At 75 or over. The whole lump sum is taxed as the member's pension income at their marginal rate (s.637C(4)). Because none of it is tax-free, it uses none of the allowance: only the non-taxable part of a lump sum counts as allowance used (s.637S(5)– (6)). The same age-75 line applies to lump sum death benefits, covered in pension death tax after 75.

Where any part of the payment is taxable, the scheme deducts income tax under PAYE when it pays. A payment that exceeds the member's lump sum and death benefit allowance is also reported to HMRC by the scheme administrator (PTM063400).

ITEPA 2003 s.637C · PTM063400

A worked example: an excess over the LSDBA

A member aged 62 has a terminal diagnosis, and their doctor's evidence says they are expected to live for less than a year. They have no protection and crystallised nothing before April 2024. In 2024-25 they took a £200,000 pension commencement lump sum from another scheme. Their remaining arrangement, a money purchase fund of £950,000, has never been drawn on, and the scheme pays the whole fund as a serious ill-health lump sum. Their other income for the year is £40,000 before the personal allowance, and they live in England.

The excess of £76,900 is added to the member’s £40,000 of other income and taxed as pension income for the year. It takes their adjusted net income above £100,000, so part of their personal allowance is withdrawn as well, which is why the effective rate on the excess is above 40%. The earlier tax-free cash reduced the LSDBA available to this payment; the payment itself leaves the lump sum allowance where it was, at £68,275 remaining. Had the member been 75 or over, none of the £950,000 would have been tax-free: all of it would have been taxed as their pension income.

The LSDBA calculator runs the same engine on other figures. It models a serious ill-health lump sum paid before 75: the allowance used, the excess and the income tax on it, stacked on the member's other income for the year. It does not calculate the tax on a payment at 75 or over, and it does not calculate a serious ill-health lump sum for a member with enhanced protection, where different rules apply.

ITEPA 2003 s.637C · s.637S — figures engine-computed against the 2026/27 config

Points to check

The figures depend on the member's full allowance history: tax-free cash taken from every scheme since April 2024, any benefits crystallised before then, any protection, and other lump sums paid on the same day. The scheme may ask the member for these details; HMRC's guidance is that without them the scheme administrator assumes no allowance is available (PTM172000). The tax on any excess also depends on the member's other income for the whole tax year, not only at the date of payment. For planning and illustration only; this page describes the law and is not tax or financial advice.

PTM172000