Lifetime allowance charge

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

Lifetime allowance charge 

The lifetime allowance 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 lifetime allowance the difference between the two is subject to the lifetime allowance charge. The lifetime allowance charge can be applied in either of two ways or a combination of both depending on how the excess benefits value above the lifetime allowance is taken. The charge is:

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

Individuals who decide to take their benefits in stages (more commonly referred to as phased retirement) will use up a proportion of the lifetime allowance 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 lifetime allowance charge works in practice:

Case studies

Excess benefits taken as cash

Joe reached his normal retirement date on the 6 April 2021 and had a benefits value of £2.5 million.  He had no lifetime allowance protection; a tax-free lump sum (TFC) entitlement of 25% and he wanted to take the income element by drawdown and the excess benefits over the lifetime allowance as cash.  The tax charge would have been as follows: 

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*TFC is the lesser of:

• 25% of the benefits value at crystallisation (£2,500,000 x 25% = £625,000), and
• 25% of the lifetime allowance at crystallisation (£1,073,100 x 25% = £268,275).

In this example Joe received a total lump sum of £910,380 with his remaining benefits value of £804,825 being used to purchase an income. A lifetime allowance charge of £784,795 was paid.

Excess benefits taken as income

Frank reached his normal retirement date on the 6 April 2021 and had a benefits value of £2 million. He had no lifetime allowance 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 lifetime allowance as income.  The tax charge would have been as follows:  

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*TFC is the lesser of:

• 25% of the benefits value at crystallisation (£2,000,000 x 25% = £500,000), and
• 25% of the lifetime allowance at crystallisation (£1,073,100 x 25% = £268,275).

In this example Frank received a total lump sum of £268,275 with his remaining benefits value of £1.5 million being used to purchase an income. A lifetime allowance charge of £231,725 was paid.

Case studies

If you need them we have more complicated lifetime allowance charge 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.