If the benefits being taken fall within the LTA no further action is needed.

However if the benefits breach the LTA then the excess is liable to a tax charge, known as the lifetime allowance charge. The rate depends on how the benefits are being taken:

• If the excess is taken as an income then it is liable to a 25% tax charge
• If the excess is taken as a lump sum then it is liable to a 55% tax charge
• If the excess is due to BCE 8 then the tax charge is 25%
• Also under BCEs 5, 5A and 5B (as these take place at age 75), no lump sum is physically paid out as the benefits haven’t been taken yet, so the charge is 25%

EG – Roger has a DB scheme worth £40,000 per annum plus a PCLS of £90,000

His DB scheme is worth £40,000 x 20 = £800,000

With the PCLS of £90,000 the total benefit is:

£90,000 + £800,000 = £890,000

This is less than the LTA of £1.03m so no action is required.

However Roger also has a personal pension worth £750,000 which he wants to take the maximum PCLS now after he’s already taken the DB scheme.

Therefore his situation is:

• The scheme pension plus PCLS from the defined benefit scheme is valued at £890,000
• Therefore, Roger has £1.03 million – £890,000 = £140,000 of his lifetime allowance remaining.
• Since only £140,000 of his lifetime allowance remains, the maximum PCLS that Roger can take from his personal pension is 25% × £140,000 = £35,000.
• The balance of the personal pension fund is placed in a flexi-access drawdown fund:

£750,000 – £35,000 = £715,000.

• The total value of his benefits is now:

£890,000 + £35,000 + £715,000 = £1,640,000.                        

The value of Roger’s benefits now exceeds the lifetime allowance, so the excess is subject to the lifetime allowance charge:

• The excess is £1,640,000 – £1,030,000 = £610,000.
• If Roger chooses to take the excess as a cash lump sum it will be subject to a lifetime allowance charge of 55%:

55% × £610,000 = £335,500.

• If Roger chooses to take the excess as an income it will be subject to a lifetime allowance charge of 25%:

25% × £610,000 = £152,500.

The tax charge as a lump sum looks worse, however if Roger takes the excess as an income then he will still have to pay income tax which could be significant based on the value of the pension. This will mostly be taxed at 40% and 45%.

As the tax charge is over £2,000 Roger can ask for the scheme to pay, which assuming he takes the income option, then the scheme would pay the £152,500 liability meaning the fund left for him would be £562,500.