Karen belongs to a money purchase registered pension scheme. She crystallises all of her scheme benefits in May 2023, when the value of her "pension pot" is £520,000. She had previously taken benefits from another scheme (in June 2016) with a value of £600,000.

She decides to take the maximum permissible tax-free lump sum in May 2023 and use the remainder of her fund (apart from any excess over the available lifetime allowance) to purchase an annuity. She is unsure whether to take the excess amount as a further lump sum or whether to use this money to increase the size of her annuity.

Explain the tax consequences of Karen's decision to crystallise her scheme benefits.