Lifetime Allowance Excess Fund Charge
Since 5 April 2006, a lifetime allowance excess fund charge is payable if your total pension capital value (or deemed capital value for any final salary benefits) exceeds the lifetime allowance at a benefit crystallisation event. It is due on any excess pension capital value over the lifetime allowance.
It is possible to have primary protection and/or enhanced protection to protect against the charge.
If you are able, and decide, to take your pension benefits in stages, then a set formula will be used to arrive at how much of your lifetime allowance may have previously been used. The answer would determine whether or not any benefits taken at a later date would exceed (and if so, by how much) the lifetime allowance.
You and your pension scheme administrator have a responsibility to report to HM Revenue & Customs any potential breach of either the annual allowance or the lifetime allowance.
If your pension scheme administrator asks you for details of any other pension arrangements you may have, you must supply full and correct information to your scheme administrator, who will use that information to determine if an allowance has been exceeded. If you do not supply this information, you may be subject to penalties.
Example - taking surplus as a lump sum:
A tax charge of 55% of the excess fund applies if you take the excess fund as a cash lump sum.
So if you had a surplus of (say) £100,000 and if you chose to take the surplus as a cash lump sum, there would be a tax charge of £55,000 leaving you with only £45,000 of the excess fund.
Example - taking surplus as a lump sum:
A tax charge of 25% of the excess fund applies if you take the excess fund as an income.
So if you had the same example surplus as above of £100,000 but instead of opting for a a lump sum, chose to take an income, then a tax charge of £25,000 would be made, leaving you with a remaining fund of £75,000 which must be used to purchase an annuity.
(The reason the charge is only 25% if you take the excess fund as income, rather than as a lump sum, is due to the fact that the ongoing annuity income would be liable to income tax.)
