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Prudential: How do you solve a problem like nearing the Lifetime Allowance?

Retirement news for Financial Advisers and Paraplanners

29 Nov 2017

Prudential: How do you solve a problem like nearing the Lifetime Allowance?

Since its peak of £1.8m in the 2011/12 tax year and three subsequent reductions since then to its current £1m level, the LTA is becoming a bigger financial headache for more members. This is exacerbated by increased transfer values from Defined Benefit schemes owing to economic conditions, and more members taking these transfers to access freedoms.

The tax charges for any monies exceeding the LTA, remembering that you can usually take up to 25% of the LTA as Pension Commencement Lump Sum (PCLS) with the rest giving an entitlement to income, are relatively simple. You pay a 55% LTA charge in a lump sum, or 25% if you elect to designate this to provide an income (any income taken is taxed at the marginal rates of the member). You could of course take a combination of income and lump sum.

So for a nil rate tax payer on extraction (which may not be likely given there is a LTA excess) they would get 75% of any excess that is designated for paying income. Basic, higher and additional rate taxpayers would get 60%, 45% and 41.25% respectively. The lump sum being a one off payment means that irrespective of marginal tax rates the member gets 45% of the excess.

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