Lifetime allowance charge - scheme pension in a defined benefit scheme

A worked example where somebody has exceeded the lifetime allowance in a defined benefit scheme.
  • Angela is a member of her employer’s defined benefit pension scheme.
  • On retirement at age 65 she has a scheme pension entitlement of £47,600 and an additional lump sum entitlement of £142,800 making the capital value of her benefits £1,094,800.
  • Angela’s lifetime allowance is £1,073,100.

Her pension scheme’s rules permit her to take any lifetime allowance excess as additional scheme pension, additional lump sum or a combination. Angela prefers the security of additional scheme pension meaning that a tax charge of 25% of the value of the excess benefits must be paid. For retirements at age 65 (females), the scheme uses a debit factor of 17.79. Her scheme will divide the amount of her tax charge by this factor to calculate the amount to deduct from her pension. This actuarial factor reflects that under Angela’s pension scheme rules contingent dependents’ pensions will continue to be calculated on Angela’s pension before the reduction. 

Pension entitlement £47,600
Capital value of pension entitlement (£47,600 x 20) £952,000
Lump sum entitlement £142,800
Capital value of benefits £1,094,800
Excess over lifetime allowance (£1,094,800 - £1,073,100) £21,700
Tax charge (£21,700 x 25%)  £5,425
 LTA excess debit (£5,425 / 17.79)  £304.95
 Angela’s reduced pension (£47,600 - £304.95)  £47,295.05

Angela’s scheme therefore pays the LTA excess charge of £5,425 to HMRC and it pays a lump sum of £142,800 and pension of £47,295.05 to Angela.

Further information

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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