The lifetime allowance (LTA) for the 2019/20 tax year is £1,055,000.
The LTA is a limit on the amount of pension benefit that can be paid from pension schemes without triggering a tax charge. If, on retirement, your benefits exceed the LTA you’ll have the additional tax charge deducted from either your pension (25%) or lump sum (55%). The value of your pension for LTA purposes is calculated as 20 x pension + lump sum.
In this example, the member’s pension benefits on their retirement in 2019/20 were:
- Pension = £56,000
- Lump sum = £120,000
LTA used = (20 x £56,000) + £120,000 = £1,240,000
As the LTA used is higher than the LTA for 2019/20, a tax charge will be payable on the excess amount.
However, the member may reduce the LTA they use by exchanging some of their pension to increase their tax free lump sum.
For more information using this example, click on the box below to find out how you can commute pension to lump sum to bring down the bill.
Capita will provide all the information you need to make a decision when you retire.