Lifetime allowance charge – excess taken as income

Published  02 February 2022
   5 min read

A worked example showing the lifetime allowance charge where the excess is taken as income.

  • Douglas had a selected retirement age of 62 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: 

Total benefits value £2,000,000
Tax-free cash (25% of standard lifetime allowance) £268,275
Benefits over the standard lifetime allowance £926,000
Lifetime allowance charge £231,725
Net of charge excess benefits value £695,175
Residual benefits value (£1,073,100 - £268,275) £804,825
Total benefits value to provide an income £1,500,000

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 2016 or fixed protection 2016 which would have reduced the amount he had over the lifetime allowance.


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