Lifetime allowance v Tax Free Lump Sum

CrazyHorseBZ

I'm sure this is a simple question but I can't find the answer anyway.
Currently the maximum LTA is £1m before you have to pay 25% on anything you draw over £1m (my simple view anyway). And you can take a 25% lump sum when you first draw down. Which takes precedence? e.g. hypothetically, if I had £2m in the pot, can I get 25% of the £2m i.e. £500k or do I get 25% of £2m-25% i.e. £375k?

jamesd

There is no tax free lump sum entitlement on amounts above the lifetime allowance, so the effective maximum at the moment is £250,000 unless you have one of the protections in place for a higher lifetime allowance.

For taking money above the lifetime allowance it's likely to be cheaper to take income instead of lump sums and pay the 25% income lifetime allowance charge plus income tax. This is because it's usually easier to reduce the income tax bill via things like VCT and EIS buying than it is to reduce the lump sum 55% lifetime allowance charge.

EdSwippet

For a simple way to view this:

• On assets below the lifetime allowance threshold, you get the 25% PCLS.
• On assets above the lifetime allowance threshold, the government takes what would otherwise be your 25% PCLS entirely for itself.

What remains after these is then taxable on withdrawal at your normal marginal rate. Above the lifetime allowance, this combination can lead to eye-watering effective marginal tax rates -- 70% at the extreme end.

Money_Help

You can apply for Fixed Protection 2016 which would protect your lifetime allowance at £1.25m as long as neither you or an employer has contributed to your pensions since 5th April 2016.

You could also potentially apply for Individual Protection if your total combined pension pot, including any final salary pensions was over £1m on the 5th April 2016. This would fix your lifetime allowance at the value of your total pension pot on this date up to £1.25m. The difference with this protection is that you can still contribute to a pension.