Any income taken from benefits above the LTA will have a LTA charge of 25% deducted plus marginal rate income tax applied to any income payments. A lump sum will be taxed at 55%. For a higher rate taxpayer, both of these options will suffer the same total tax as 25% of the total plus 40% of 75% is the same as 55%. From a tax point of view, a basic rate taxpayer will be better off taking income and an additional rate taxpayer will be better off taking a lump sum.
If the individual dies with uncrystallised benefits, these are tested against their remaining lifetime allowance. The personal representatives are then responsible for working out any chargeable amount and reporting this to HMRC. The recipient of the death benefit would then be assessed and be liable for any charge due. This is different from the process applied during the lifetime of the individual where the scheme administrator would deduct any charge and pass this to HMRC.
There are currently two forms of protection available – fixed protection 2016 and individual protection 2016. Fixed protection 2016 fixes the LTA at £1.25 million and individual protection 2016 fixes the LTA at the lower of the value of all pensions at 5 April 2016 and £1.25 million. Individual protection 2016 will only be an option if the value of all benefits at 5 April 2016 is at least £1million.You can only apply online and there is no deadline.
As the LTA is due to increase each April by CPI, the standard LTA could end up higher than a protected LTA. If this happens, the protection simply falls away and the individual becomes subject to the standard LTA.
If a LTA charge arises due to one of the 3 benefit crystallisation events at age 75, the LTA charge is 25%. This is because no lump sum is actually being paid. Any income taken after this point will be taxed at the individual’s marginal rate.
You can find more information about the lifetime allowance in the articles below:
Business Development Manager
Fiona has worked in financial services since leaving the University of St Andrews in 1998. She has worked mainly in technical roles although has also worked as a Chartered Financial Planner. She has worked for Royal London since 2015. Fiona is a fellow of the Personal Finance Society and has an MBA from the Open University. She is also the current president of the Insurance Society of Edinburgh.