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 2012 at age 65 with DC savings of £1,200,000.
- He designates £900,000 for drawdown and takes £300,000 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 2022, James’s scheme administrator must carry out a BCE 5A check to see if a lifetime allowance charge is due on the net growth in his funds.
James’s situation will be as follows:
|Total DC savings at age 65||£1,200,000|
|Amount designated for drawdown at age 65||£900,000|
|Lifetime allowance in 2012||£1,500,000|
|% of lifetime allowance used||80%|
|Lifetime allowance at age 75||£1,073,100|
|Value of drawdown funds at age 75||£1,510,339|
|Net growth in funds at age 75||£610,339|
|Lifetime allowance remaining at age 75||£1,073,100 – [(£1,200,000 x £1,073,100/£1,500,000)] = £214,620 (20%)|
|Excess over lifetime allowance at age 75||£395,719 (£610,339 - £214,620)|
|Tax charge (£395,719 x 25%)||£98,930|
|Residual fund (£1,510,339 - £98,930)||£1,411,409|
The scheme therefore pays the lifetime allowance excess charge of £98,930 to HMRC and James’s fund is reduced to £1,411,409.
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