How is the charge calculated?
Although benefits crystallised before 6 April 2006 will not incur any lifetime allowance charge, the value of these funds is taken into account when a further crystallisation event occurs after A-Day. If your client was in drawdown before A-Day, the value of those benefits would be deemed to be 25 times the maximum income available at the last triennial review or, if no review has yet taken place, at the commencement date.

Once the first crystallisation event has taken place post A-Day, your client will get a certificate showing the amount of the lifetime allowance they have used. This should be retained for future reference.

Example
For example, George commenced drawdown from his SIPP in 2001. His maximum annual gross income at his triennial review was £50,000, although he chose to only take income of £39,000. In June 2008 George buys an annuity with his retirement annuity fund valued at £500,000. The lifetime allowance calculation would be as follows:

As the total value exceeds the standard lifetime allowance in 2008/9 by £100,000, this amount would be subject to a lifetime allowance charge.

How much is the charge?
Where excess benefits are subject to a lifetime allowance charge, there are two options available.
If the excess is drawn as a lump sum then it will be subject to a charge of 55%.

If the excess is drawn as an income stream then it will be subject to an initial charge of 25% but also be subject to income tax at your marginal rate on the income received. Therefore, if you are a higher rate tax payer, the effective tax rate will also be 55%.

Using the example above:

If the excess is drawn as a lump sum, the charge will be

£100,000 x 55% = £55,000.

If the excess is drawn as an income stream the initial charge will be

£100,000 x 25% = £25,000.

The remainder is then taxed at 40% as it is drawn

(£100,000-£25,000) x 40% = £30,000.

This gives an overall tax charge of

£25,000 + £30,000 = £55,000.