Lifetime allowance: our top five frequently asked questions

24 September 2018
Following on from last month’s top five questions on death benefits we thought we’d share our top five most frequently asked questions on the lifetime allowance (LTA).
      1. From a tax point of view which option is better, taking the excess above the LTA as income or a lump sum?

        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.

      2. Who pays the LTA charge when an individual dies?

        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.

      3. What current forms of protection are available and what is the deadline for applying?

        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. 

      4. What happens if the standard LTA ends up higher than the protected LTA?

        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.

      5. What is the LTA charge at age 75?

        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. 

Want to know more?

You can find more information about the lifetime allowance in the articles below:

About the author

Fiona Hanrahan

Pensions Development and Technical 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 involved in developing adviser facing content, presenting, writing articles and commenting for the press. 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. Fiona has young twins who take up most of her spare time although she likes visiting new cities, going to the cinema and keeping fit.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.