Lifetime allowance charge – excess taken as income

A worked example showing the lifetime allowance charge where the excess is taken as income.
  • Douglas reached his normal retirement date on the 6 April 2020 and had benefits in a personal pension arrangement of £2,000,000.
  • Douglas does not have any lifetime allowance (LTA) protection.
  • The lifetime allowance at 6 April 2020 was £1,073,100.

Douglas’s excess benefits value is £926,900 (£2,000,000 - £1,073,100). Douglas is taking the excess benefits value as income so the scheme administrator deducts a tax charge of 25% of the excess (£231,725). This leaves a net excess value of £695,175.

The benefits Douglas takes from his personal pension scheme are as follows: 

Tax-free cash (25% of standard LTA) £268,275
Net of charge excess benefits value £695,175
Residual benefits value (£1,073,100 - £268,275) £804,825

The scheme administrator pays HMRC the tax charge of £231,725 and pays tax-free cash to Douglas of £268,275. Douglas uses the remaining benefits value of £1,500,000 to purchase a lifetime annuity.

Douglas may have been eligible for individual protection 16 or fixed protection 16 which would have reduced the amount he had over the lifetime allowance.

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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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.