Lifetime allowance charge

Anyone who has pension benefits with a value in excess of the lifetime allowance (LA) will be subject to a tax charge on their excess benefits value known as the lifetime allowance charge.
Key facts
  • The lifetime allowance is the maximum value of benefits that can be taken from a registered pension scheme without being subject to the lifetime allowance charge.
  • Benefits in excess of the lifetime allowance could be protected from the lifetime allowance charge by using primary, enhanced, fixed protection (2012, 2014 or 2016) and individual protection (2014 or 2016).
  • The lifetime allowance is currently £1,055,000 (increased from £1,030,000) 
  • The lifetime allowance charge is 55% if the benefits in excess are taken as a lump sum, or 25% if they are taken as income.
  • Lifetime allowance charge case studies

This analysis focuses on the main points to consider and provides a few examples of how this charge will apply.

Lifetime allowance charge (LAC)

The LA creates a ceiling on the benefits value that can be built up by members of registered pension schemes whilst continuing to benefit from tax relief. If the benefits value when they are taken exceeds the LA the difference between the two is subject to the LAC. The LAC can be applied in either of two ways or a combination of both depending on how the excess benefits value above the LA is taken. The charge is:

  • 55% if taken as a lump sum, or
  • 25% if taken as income.

Members who decide to take their benefits in stages (more commonly referred to as phased retirement) will use up a proportion of the LA in force each time benefits are taken. When somebody takes any of their benefits this is known as a 'benefit crystallisation event'. Anyone taking their benefits either in full or in stages will have one or more benefit crystallisation event. Let's have a look at a few examples of how the LAC works in practice:

Case studies

Excess benefits taken as cash

Joe reached his normal retirement date on the 6 April 2018 and had a benefits value of £2.5 million.  He had no LA protection; a tax-free lump sum (TFC) entitlement of 25% and he wanted to take his the income element by drawdown and the excess benefits over the LA as cash.  The tax charge would have been as follows:  

Excess benefits taken as cash

*TFC is the lesser of:

  • 25% of the benefits value at crystallisation (£2,500,000 x 25% = £625,000), and
  • 25% of the LA at crystallisation (£1,055,000 x 25% = £263,750).

In this example Joe received a total lump sum of £914,000 with his remaining benefits value of £791,250 being used to purchase an income. A LAC of £794,750 was paid.

Excess benefits taken as income

Frank reached his normal retirement date on the 6 April 2018 and had a benefits value of £2 million.  He had no LA protection; a tax-free lump sum (TFC) entitlement of 25% and he wanted to take his the income element by drawdown and the excess benefits over the LA as income.  The tax charge would have been as follows:  

excess benefits taken as income

*TFC is the lesser of:

  • 25% of the benefits value at crystallisation (£2,000,000 x 25% = £500,000), and
  • 25% of the LA at crystallisation (£1,055,000 x 25% = £263,750).

In this example Frank received a total lump sum of £263,750 with his remaining benefits value of £1.5 million being used to purchase an income. A LAC of £236,250 was paid.

Case studies

If you need them we have more complicated LAC case studies which you may find helpful.

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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Last updated: 05 Apr 2019

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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.