RPSM03105180 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Primary protection: Example 2 - benefits taken at different times

Protection of lump sums with primary protection: taking benefits at more than one time, some lump sum benefits are not tax-free: example 2

Dean had registered pension rights of £3 million and lump sum rights of £800,000 by commutation under primary protection on 5 April 2006. £3 million was the equivalent of the standard lifetime allowance (£1.5 million) plus an additional factor of 1.

In January 2011, Dean took pension rights worth £3 million plus a lump sum of £600,000. In tax year 2010-2011 the standard lifetime allowance was £1.8 million. So Dean’s personal lifetime allowance is £3.6 million (this being the standard lifetime allowance of £1.8 million at the time plus a factor of 1) and his maximum protected lump sum is £960,000 (£800,000 x £1.8million/£1.5 million). Dean has now used up all of his personal lifetime allowance.

In 2013, Dean took further benefits including a lump sum, and paid a lifetime allowance charge on the whole of the benefits that he took.

Although Dean originally had a lump sum right of £800,000, he did not use this up whilst he had some personal lifetime allowance remaining. The result is that any lump sum taken after his personal lifetime allowance has been used up in full is not a pension commencement lump sum. The payment will be a lifetime allowance excess lump sum and so it is subject to the lifetime allowance charge.