FOR ADVISERS ONLY
Lifetime allowance charge – excess 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 | £926,900 |
| 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.
Further information
- HMRC Pensions Tax Manual - PTM085000: Chargeable amount where the lifetime allowance is used up
- 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.
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