RPSM03105150 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Primary protection: Example - all benefits taken at the same time

Example of protection of lump sums with primary protection: taking all benefits at one time and all lump sum benefits are tax-free

Dilip has lump sum rights on 5 April 2006 of £1 million and he has primary protection on pension rights of £5 million (this includes the value of his lump sum rights). His lifetime allowance enhancement factor is 2.34 (see RPSM03102020 to see how this factor has been calculated).

Dilip decides to take all of his benefits in 2015 when the standard lifetime allowance is £1.5 million. His pension rights, which are held in a money purchase arrangement, are valued at £6.8 million. The amount of Dilip’s respective protected pension and lump sum rights are now £6.012 million (£1.8 million + £1.8 million x 2.34 = £6.012 million) and £1.2 million (£1 million x 1.8/1.5) (see RPSM03102020 to find out how these figures have been arrived at).

Dilip decides to take a pension commencement lump sum of £1. 2million, which is equal to the maximum allowed, and designates the remaining £5.6 million as a drawdown pension fund to provide drawdown pension. As the value of benefits paid (£6.8 million) is more than the value of his primary protection (£6.012 million), there is a lifetime allowance charge on the excess (£788,000). As the pension commencement lump sum crystallises first for lifetime allowance purposes the rate of the lifetime allowance charge is 25%., so the tax due is £197,000. The scheme administrator will deduct this amount from the £5.6 million leaving £5.403 million available to provide drawdown pension.