Lifetime allowance charge - Case studies

Anyone who has pension benefits with a value in excess of the lifetime allowance (LA) will be subject to a tax charge on their excess benefits value known as the lifetime allowance charge. These case studies show how this charge is applied.
Key facts
  • The lifetime allowance is the maximum value of benefits that can be taken from a registered pension scheme without being subject to the lifetime allowance charge.
  • Benefits in excess of the lifetime allowance could be protected from the lifetime allowance charge by using primary, enhanced, fixed protection (2012, 2014 or 2016) and individual protection (2014 or 2016).
  • The lifetime allowance is currently £1,055,000 (increased from £1,030,000) 
  • The lifetime allowance charge is 55% if the benefits in excess are taken as a lump sum, or 25% if they are taken as income.

In our Lifetime allowance charge (LAC) article we had some basic examples showing how the charge is applied.

As life is rarely that simple we have some more complicated case studies to help bring the subject to life.

The LAC can be applied in either of two ways or a combination of both depending on how the excess benefits value above the LA is taken. The charge is:

  • 55% if taken as a lump sum, or
  • 25% if taken as income.

Phased retirement

Emma was 57 on the 6 April 2010 and had a benefits value of £3 million. She takes her benefits in two stages - 6 April 2010 and 6 April 2019 and had not applied for any form of protection and had a TFC entitlement of 25% of the benefits value.

On 6 April 2010 Emma decided to take £500,000 of her benefits value - 25% as TFC with the balance used to provide an income. The LAC that would apply on her excess benefits value would be as follows: 

Phased retirement

TFC is the lesser of: 

  • 25% of the benefits value at crystallisation (£500,000 x 25% = £125,000), and
  • 25% of the LA at crystallisation (£1,800,000 x 25% = £450,000)

In this example Emma received a total lump sum of £125,000 with her remaining benefits value of £375,000 being used to purchase an income. No LAC is payable at this time. On the 6 April 2016 the lifetime allowance reduced from £1.25 million to £1 million. As she had not applied for primary or enhanced protection Emma decided to apply for fixed protection 2016. This lets her keep the £1.25 million lifetime allowance, although there are conditions that apply. Emma cannot:

  • Accrue more benefits in any pension plan, e.g. pay more contributions to a money purchase plan or accrue more benefits under a defined benefit arrangement.
  • Start a new plan unless it is set up to accept a transfer value.
  • Transfer benefits anywhere other than to a registered pension scheme or to a qualifying recognised overseas pension scheme.
  • Transfer benefits from a money purchase scheme to a cash balance or defined benefit scheme.

At the 1st crystallisation event Emma used up £500,000 of her benefits value to provide retirement benefits. This was 27.78% of the lifetime allowance at the time (£1.8 million). The remaining 72.22% is applied to the LA in force at the 2nd benefit crystallisation event, before calculating the excess benefits value that any lifetime allowance charge would apply to. This process is repeated each time benefits are taken until the whole benefits value is used up. So, as Emma has fixed protection 2016 and takes her remaining benefits (including her excess benefits value as cash) on the 6 April 2019 having already used up £500,000 of the LA, the LAC that will apply is as follows:

Phased retirement

TFC is the lesser of:

  • 25% of the benefits value at crystallisation (£3,250,000 x 25% = £812,500), and
  • 25% of the available portion of the LA at crystallisation [(£1,250,000 x 72.22%) x 25% = £225,687.50]

In this example Emma receives a total lump sum of £1,281,950 with her remaining benefits value of £677,062.50 being used to purchase an income. A LAC of £1,290,987.50 is paid.

If Emma hadn't applied for fixed protection 2016 and takes her remaining benefits (including her excess benefits value as cash) on the 6 April 2019 having already used up £500,000 of the LA the LAC that will apply is as follows:

Phased retirement

 TFC is the lesser of:

  • 25% of the benefits value at crystallisation (£3,250,000 x 25% = £955,300.20), and
  • 25% of the available portion of the LA at crystallisation [(£1,055,000 x 72.22%) x 25% = £190,480.25]

In this example Emma receives a total lump sum of £1,310,115.85 with her remaining benefits value of £571,440.75 being used to purchase an income. A LAC of £1,368,443.40 is paid.  

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.

Share:

Share:

Last updated: 05 Apr 2019

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

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.