Lifetime allowance charge – excess taken as income

• Douglas reached his normal retirement date on the 9 September 2021 and had benefits in a personal pension arrangement of £2,000,000.
• Douglas does not have any lifetime allowance protection.
• The lifetime allowance at is £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: 

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

• Lifetime allowance - All you need to know
• Lifetime allowance
• Lifetime allowance at age 75 case study
• Lifetime allowance charge
• Benefit crystallisation events and the lifetime allowance charge
• Lifetime allowance charge - case studies
• Lifetime allowance charge - scheme pension in a defined benefit scheme
• Lifetime allowance charge - designated money in drawdown at age 75
• Lifetime allowance - opt in or out of an employer's pension scheme

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.