Lifetime allowance charge - designated money in drawdown at age 75

A worked example of how the lifetime allowance charge is calculated for somebody in drawdown at age 75.
  • James retired in September 2010 at age 65 with DC savings of £1,400,000.
  • He designates £1,050,000 for drawdown and takes £350,000 tax-free cash.
  • James and his partner can live comfortably off the income from her business, so James doesn’t take any income from his drawdown plan.
  • On reaching age 75 in 2020, James’s scheme administrator must carry out a BCE 5A check to see if an LTA charge is due on the net growth in his funds.

If James’s funds in drawdown enjoy net growth of 5% each year, the situation will be as follows:

Total DC savings at age 65 £1,400,000
Amount designated for drawdown at age 65 £1,050,000
% of LTA used at age 65 in 2010 77.78% (£1,400,000 / £1,800,000 x 100)
LTA at age 75 £1,073,100
Value of DD funds at age 75 £1,710,339
Net growth in funds at age 75 £660,339
LTA remaining at age 75 £238,443 (£1,073,100 x 22.22%)
Excess over LTA at age 75 £421,896 (£660,339 - £238,443)
Tax charge (£421,896  x 25%) £105,474
Residual fund (£1,710,339 - £105,474) £1,604,865

The scheme therefore pays the LTA excess charge of £105,474 to HMRC and James’s fund is reduced to £1,604,865.

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.