Chapter 2 – HMRC Tax Regime (10 marks) Flashcards
(92 cards)
1
Q
Why is 6th April 2006 significant?
A
This was ‘A-day’
It introduced new rules to simplify pension planning and have a more straightforward pension regime for individuals. It covered what you contribute into a pension and what you can take out.
2
Q
What is the Pensions Tax Manual?
A
It contains the pension simplification rules pre/post A-day and shows how terms/definitions have changed overtime (LOOK AT BOX 2.2)
3
Q
Contributions & benefits are measured against serveral allowances such as the annual allowance, Lump sum and death benefit allowance and so on. There are all expressed as capital sums. For example, the annual allowance is £60000
What issue does this cause and how do HMRC resolve it?
A
Some schemes benefits are income (such as DB schemes) whereas DC schemes benefits are based on a capital fund you built up.
It’s not possible to test an income against a capital sum allowance(such as the annual allowance), so there is a need for a ‘valuation factor’ to convert incomes into notional capital sums.
HRMC have 3 valuation factors:
16:1
20:1
25:1
Each have their own respective uses. (See table in 2.1)
4
Q
What replaced the lifetime allowance in 2024?
A
The lifetime allowance was abolished.
It has been replaced by the Lump Sum and Death Benefit Allowance (LSDBA), & the Lump Sum Allowance (LSA)
5
Q
What is the lifetime allowance (now abolished) also known as?
A
The standard allowance
6
Q
What is the lifetime allowance (now abolished) also known as?
A
The standard allowance
7
Q
For the R04 exam we must separate out two key areas:
What an individual receives tax relief on.
What will trigger a tax charge on annual contributions or DB scheme benefits.
For any exam questions, you must establish which of these two points you are being tested on, as this will affect the answer you select.
A
READ 2.3
8
Q
What can an individual get tax relief on, in terms of personal contributions into an Registered Pension Scheme?
A
Tax relief on individual contributions are limited to the greater of 100% of gross salary and £3,600 gross annually
NOTE. The individual must qualify as a ‘relevant UK individual’ to receive the tax relief and use ‘relevant UK earnings’
9
Q
To receive tax relief on contributions you must be a relevant UK individual
Ie, be below the age of 75 and satisfy 1 of the 4 rules (see 2.3)
A
If an individual is not classed as a relevant UK individual, this does not stop pension contributions from being made in theory, but they will NOT receive any tax relief.
LOOK AT EXAMPLES!
10
Q
What is classed as relevant UK earnings?
Why is this important?
A
Many people incorrectly think that if income is subject to UK tax, it will be classed as relevant UK earnings.
This is not always the case, as you will see. Relevant UK earnings include:
Income from employment, including salary, bonuses, overtime, commission, taxable benefits in kind and statutory sick pay (SSP)
Income from a trade, profession or vocation (self-employed earnings)
Taxable patent income
Overseas Crown employment earnings subject to UK income tax
11
Q
What is patent income?
A
This is income from an invention, idea, or template that you have registered with the Intellectual Property Office (IPO). Think of an inventor such as James Dyson
This is one type of relevant uk earnings
12
Q
What is overseas Crown employment?
A
Examples of Crown servants are soldiers, naval workers, and members of the diplomatic service. Such individuals are employed by the Crown. Their earnings are subject to UK income tax, even though they may be living and working abroad.
This is one type of relevant UK earnings
13
Q
What common types of income are not classed as relevant UK earnings?
A
Bank and building society interest, income from dividends, rental income from buy to let properties and income from pensions
NOTE:
Many directors take more of their income as dividends and less as salary due to NIC issues. Whilst this saves money on NICs, dividends are not classed as relevant UK earnings and therefore not pensionable from the individual’s perspective.
14
Q
How many types of pension schemes can an individual contribute to?
A
There is no restriction on the number or type of RPSs that an individual can contribute to.
15
Q
There is no limit on contributions from an employer or the number of schemes that can be used. True or false
A
True
16
Q
What is Salary sacrifice also called?
A
salary exchange
It follows a set process and involves the employee formally ‘sacrificing’ some salary in return for higher employer pension contributions.
17
Q
HMRC requires several key conditions to be fulfilled for the salary sacrifice arrangement to be valid.
A
Main ones to remember;
The decision cannot be changed unless the employee suffers a lifestyle change (e.g. Divorce).
The employee salary cannot be reduced below the national minimum wage
18
Q
What is an in-specie contribution?
What is an In-specie transfer?
READ 2.3
A
A type of contribution usually made in pension schemes like SIPPs.
in-specie contribution = where a pension contribution is made using assets such as shares or other allowable investment types, NOT cash. When making the contribution it becomes a debt on the person that they must pay back
In-specie transfer = This is where an asset that is already within the wrapper of an RPS (its already been added via a in-specie contribution) is transferred to a new scheme.
19
Q
What does it mean to recycle tax free cash?
READ 2.3
A
This is where the member takes their tax-free cash, and then recycles it as a new contribution
The reason for recycling is to access effectively double tax relief on the contributions. The member received tax relief in their original pension scheme, and by recycling are getting this for a second time.
note
How does HMRC view recycling of tax-free cash?
They are not very keen on it (and that’s an understatement!).
Remember all the tax perks HMRC give members to encourage them to save more towards retirement – HMRC don’t give us tax relief on pension contributions at our highest marginal rate, for us to then try and ‘double bubble’ this relief.
If the member falls foul of the recycling rules, then their entire tax-free cash amount will be treated and taxed as an unauthorised payment. This subject is covered in section 2.6.3 of this chapter.
Suffice it to say, the member may find themselves staring down the barrel of a 55% tax charge, based on their entire tax-free cash amount, not just the funds they have recycled.
There are four in total. And all these conditions must be met, for the entire tax-free cash to be treated as an unauthorised payment. (SEE 2,3) AND SEE EXAMPLE
20
Q
If a member meets all 4 conditions of the tax free cash recycling rules, their entire PCLS will be classed as an unauthorised payment and therefore subject to a 55% tax charge
A
21
Q
An individual’s tax relievable RPS contributions are capped at the greater of:
100% of gross salary, or
£3,600 annually with no reference to salary
Individuals, if classed as a relevant UK individual, can contribute more than this to a UK RPS but will not receive tax relief on any excess
A
This £3,600 rule means that individuals with no income can contribute towards their retirement planning.
This will include individuals such as house-persons, students and the unemployed.
Even though these individuals may pay little or no income tax, they can still contribute £3,600 gross per tax year, and receive basic rate income tax relief.
This means that, each year, the net cost to them will be £2,880 (20% x £3,600= £720 tax relief due).
22
Q
A 77year old grandmother contributions £3600 gross for her grandson.
Will this receive tax relief given that the grandmother is over 75 (and therefore not classed as a relevant UK individual)
A
The eligibility rules (ie, UK relevant individual and UK releavnt earnings) are based on the plan holder (in this case the grandson), not the third party paying the conributions
23
Q
What happens if an individual with no income pays in more than £3,600 gross annually?
A
They can pay in more than this but will not receive tax relief on the excess.
A tax charge at the applicable marginal rate would be due on any excess.
24
Q
What is Adjusted net income?
A
This is much income tax an individual will pay, how much personal allowance they are entitled to in relation to income tax, or whether they will be subject to certain charges, such as the DWP High Income Child Benefit Charge.
Adjusted net income is an individual’s total income from all sources.
This will include:
Salary, bonuses, overtime, and commission
Interest and dividend payments
NOTE: One way that an individual can reduce their adjusted net income is by personally making a pension contribution. Pension contributions reduce adjusted income, and this can help an individual in a number of different ways.
25
What happens if someone self-employed contributes more than their gross earnings to an RPS?
This could easily happen. A self-employed person may have had higher profits the previous trading year and expects these to continue. They make a higher pension contribution on this basis and then find their profits have fallen, when finally confirmed by their accountant.
In this situation, if too much tax relief has been given this will be sorted out through the self-assessment process. Any excess will be chargeable at the member’s marginal rate
REMEMBER U CAN CLAIM A MAX OF £3600 OR SALARY IF HIGHER, which is why it is easy for self employed to over judge
26
What are the 3 main Methods of individual contribution tax relief
Net pay =
Net pay method
This is where any individual gross pension contribution made is deducted from gross pay before the employer calculates income tax due via the PAYE system.This means that tax relief is given directly, be that basic, higher or additional rate. The member gets their highest rate of relief upfront.
Relief at source
With this method, pension contributions are paid net of basic rate tax
This BRT relief is claimed by the provider direct from HMRC and added to the pension plan contribution as illustrated.
Higher or additional rate tax relief is claimed through self-assessment.
Relief by making a claim
Individuals that are contributing to a Retirement Annuity Contract will not receive tax relief on contributions up-front through either method above. Premiums must be paid gross, with all tax relief reclaimed through self-assessment. The reason for this is that RACs are ‘old style’ contracts.
27
Do in specie contributions qualify for tax relief
No, not anymore
28
Employer contributions -
Contributions are paid gross.
Subject to satisfying HMRC rules, the employer contribution will qualify as a deductible or allowable business expense. This means that contributions can be offset against the tax liability of the employer. If the employer’s status is that of a limited company, this will be offset against corporation tax.
An employer can also be a sole trader or a partnership, in which case contributions will be treated as a deductible business expense against income tax.
For an employer to be allowed to off-set pension contributions against tax, they must pass the ‘wholly and exclusively for the purpose of trade’ test. These are complex rules, so we will stick to the basics.
29
30
What is the annual allowance and what happens if it is exceeded
It is a cap on DC contributions and DB annual benefit accrual.
Technical definition =
The annual allowance is the maximum monetary amount of ‘total pension input’ permitted for each ‘pension input period’, before a tax charge is triggered for the individual.
Any excess over the annual allowance is added to an individual’s other taxable income in that period, to work out the tax due. As a result, the annual allowance charge can be paid at 20%, 40% and/or 45%.
31
What is a pension input period?
This is the period over which an individual’s ‘total pension input’ will be measured, to enable an annual allowance test to be carried out.
32
an individual’s total pension input is tested against the relevant AA to calculate any excess. An excess is known as WHAT?
The chargeable amount
The chargeable amount is subject to the individuals marginal rate of tax depending on where it falls into their tax brackets. E.g. some could be subject to BRT whereas another part could be HRT
33
an individual’s total pension input is tested against the relevant AA to calculate any excess. An excess is known as the chargeable amount
34
What is the difference between net taxable income & net income
net taxable income = after all allowances
net income =
35
The TAA was introduced from 6th April 2016. An RPS member with adjusted income of more than £260,000 and threshold income of more than £200,000 will have their AA ‘tapered’ to less than £60,000 using the well-known ‘£1 for every £2 over’ method we have become used to from HMRC. You must fail both income levels to have a tapered AA.
An individual’s AA will not be reduced below £10,000 regardless of their level of adjusted income.
What is Threshold income and Adjusted income?
36
The TAA was introduced from 6th April 2016. An RPS member with adjusted income of more than £260,000 and threshold income of more than £200,000 will have their AA ‘tapered’ to less than £60,000 using the well-known ‘£1 for every £2 over’ method we have become used to from HMRC. You must fail both income levels to have a tapered AA.
An individual’s AA will not be reduced below £10,000 regardless of their level of adjusted income.
What is Threshold income and Adjusted income?
An individual will be subject to the TAA if they have adjusted income of over £260,000 and threshold income over £200,000.
(Ie they must fail both calculations (read if unaure about this)
37
What is the calc for a DC's total pension input
What is the calc for DB schemes total pension input
38
What is the calc for threshold income
What is the calc for adjusted income
(these are both used to calc if someone is subject to the tapered annual allowance. They must exceed BOTH thresholds)
39
What is the money purchase annual allowance?
The MPAA was introduced by the TOPA 2014. It is designed to prevent relevant UK individuals crystallising pensions as cash using pension freedoms, recycling this cash as a new DC pension contribution, and receiving another lot of contribution tax relief on such ‘new’ contributions
40
What two things are considered to see if the MPAA is applicable?
Step 1 = Has a trigger event occured? (move onto step 2 if yes)
Step 2 = Level of DC total pension input in subseqent Pension input periods
If both thresholds have been met the MPAA may be applicable
LOOK AT 2.5 TO SEE TRIGGER EVENTS
MAIN WAY TO REMEMBER TRIGGER EVENTS IS TO THINK, WHAT ACTIONS CAN THE DC MEMBER TAKE TO ACCESS THEIR DC PENSION AS CASH WHERE IT COULD POTENTIALLY BE RECYCLED
Non trigger events tend to be actions that are not new with pension freedoms. Taking PCLS was introduced in 2006 (though it existed before this as tax-free cash) is not a trigger event
41
If the MPAA is triggered it will apply for every future tax year
True or false?
True
42
The MPAA only applies to the member of the pension scheme. It is them who has to do a trigger event
It does not apply to others who may access the pension in a way that would otherwise be a trigger event such as a spouse, or a nominee or successor.
43
Having considered why the MPAA was introduced, and its trigger events, we will now look at how it works in practice.
If the answer to step 1 was ‘yes, there has been a trigger event’ we then go on to consider the second question. The question in step 2 is: ‘What is the level of DC total pension input for the member’s PIPs?’. This could be the current or future PIPs.
This is logical, as the HMRC are checking: ‘has the member taken more pension as cash and then recycled large amounts of it’. This is what the MPAA is trying to prevent and something that annoys HMRC greatly!
44
Any unused MPAA cannot be carried forward. True or false
True
45
What is the Alternative Annual Allowance?
DO NOT CONFUSE THIS WITH THE RECYCLING CASH RULES
This is what is triggered if a person has successfully triggered the MPAA (ie trigger event + £10k in DC pension input)
Upon successfully triggering the MPAA the annual allowance is split into 2 parts. 1 part being the MPAA for any DC pensions and the other part being the AAA for DB pensions as seen below.
£10k MPAA for DC pensions
£50k AAA for DB pensions
This will remain forever. Carry forward can be used for the AAA but NOT for the MPAA
46
Once the member has had a trigger event, if their DC TPI is more than £10,000 in any subsequent tax year, this will also trigger the MPAA (HMRC have thought of everything). NOT JUST THE SAME YEAR!
47
RPS can hold many types of investments where they gain favourable tax treatment as a result (see table in 2.6)
Some investments however can be held in RPS but will be subject to very high tax charges so RPS avoid these. An example is taxable property.
What is this and what are tax charges on them?
Taxable property is any type of investment used by an RPS from which the member could derive some personal benefit.
Taxable property examples =
A holiday home.
Vintage wines
A skiing chalet.
Supercars such as a Ferrari or Aston Martin.
These investments are subject to an unauthorised taxation charge
These taxation charges can be split into three groups:
The unauthorised payments charge (UPC)
This is levied at a flat rate of 40% on the value of the taxable property. So, imagine that the chalet in Méribel is worth £500,000, the tax charge would be £200,000. This would be paid by the member, not the scheme, through self-assessment, out of their own pocket.
The unauthorised payments surcharge (UPS)
This is also the member’s liability. It is an additional 15% tax charge, if the value of the unauthorised payment is 25% or more of the value of the overall RPS. So, imagine the RPS has a fund value of £1,000,000, and the unauthorised payment is the £500,000 that we mentioned above in relation to the ski chalet. An additional £75,000 would need to be paid by the member through self-assessment.
A scheme sanction charge (SSC)
The RPS itself could face a tax charge of 15% to 40% of the value of the unauthorised payment. Few schemes allow these investment types as a result.
48
Similar to the 'unauthorised payment charges' there is a another significant tax charge that could be levied on schemes called the De-registration charge.
What is this?
If HMRC withdraws the RPS status of a scheme, there is a de-registration charge levied. (HMRC could do this if any unauthorised taxation charges are not paid)
This is levied at a 40% rate on the value of the scheme's assets at the point immediately before registration withdrawal. The scheme administrator pays this. At the same time, the scheme will then lose all the tax benefits associated with a registered pension scheme.
Imagine the effect that would have on your clients and the pensions advice you give.
As a result, a scheme will do all it can to ensure as few unauthorised payments as possible are paid. Schemes do not like paying unauthorised payments or investing into taxable property, and will avoid these at all cost.
49
What is an unauthoirsed taxation charge
What is a De-registration charge.
50
What are Relevant Non-UK Pension Schemes?
It a collective term for 2 types of Oversea pension schemes: The Qualifying Recognised Overseas Pensions Schemes (QROPS) and Recognised Overseas Pensions Schemes (ROPS).
These are A TYPE of alternative pension scheme to RPS in the UK
Who would use a QROPS / ROPS?
Someone retiring abroad and looking to start taking retirement income. So ex-pats looking to live out their retirement in warmer climates.
How are transfers to QROPS / ROPS treated?
These are classed as an authorised transfer so will not attract unauthorised payment charges
the amount transferred to a QROPS is instead tested against the Overseas Transfer Allowance (OTA) which is set at the same level as the individual’s lump sum and death benefit allowance (currently £1,073,100).
Any benefits that exceed the OTA will be taxed at a flat rate of 25%. This is known as the Overseas Transfer Charge (OTC).
51
What are reporting requirements in relation to a QROPS?
Imagine your client transfers their UK RPS to a QROPS based in Italy, as they plan to retire there. They must:
Report to HMRC any member payments that would not have been allowed under a UK RPS.
This ensures UK rules on retirement benefits are not broken.
Otherwise a member payment charge will apply.
Report to HMRC when they pay benefits from the transferred fund or if they transfer the fund again:
o Payments made within 10 years of the transfer must be reported regardless of the individual's residence status.
o Even if the transfer was made more than 10 years ago, payments to individuals who are UK resident or have been in the last 10 years have to be reported.
52
What is a member payment charge?
this is the overseas equivalent of unauthorised payments taxation. There is a 40% tax charge, and a 15% surcharge applied if such rules are broken.
53
What is a Recognised Overseas Pension Scheme (ROPS)?
This is an overseas pension scheme that has received UK tax relief at some point. It has not however been given any special status by HMRC.
54
If you transfer your fund to a QROPS after 6th April 2017, for how long after is the pension still subject to UK tax rules?
5 tax years after the date of transfer, regardless of where the individual is resident or not
Therefore, if you’re moving abroad and thinking of transferring your pension abroad to avoid UK tax, make sure you don’t take any funds out of the QROPS for at least 5 years!
55
Look at example 2.32
56
What happens with individual who receives payments from a Relevant Non UK Scheme (RNUKS) during temporary non-UK residence?
Remember: RNUKS is a collective name for QROPS & ROPS
Non residence period is considered and the taxation treatment
Read 2.6
LOOK AT EXAMPLES 2.33
57
The annual allowance and its application
The AA caps the DC contributions / DB benefit accrual before a tax charge is incurred.
Total pension input is tested against the relevant AA from the applicable pension input period.
The start of the first pension input period depends on whether the scheme is DC or DB.
DC starts with the first premium payment; DB starts with when rights first start to accrue.
TPI varies according to scheme type: DC is individual plus employer plus third-party contributions added together/ DB is benefits increase, using 16:1 valuation factor.
The AAC can be 20%, 40% and/or 45%.
The MPAA is potentially triggered by taking income / cash using pension freedoms like FAD or UFPLS.
The TAA is a reduced AA where the individual has adjusted income of more than £260,000 and threshold income of more than £200,000. It cannot be tapered below £10,000.
58
Pension funds and allowable investments, unauthorised taxation, and alternative pension schemes
Pension funds pay little internal tax; they cannot reclaim any stamp duty paid on commercial property purchase and shares, but that is about it in terms of pension fund taxation.
Many types of assets can be held within the wrapper of a RPS, including cash, fixed-interest securities, direct share holdings, collective investments schemes and commercial property.
Some asset types are classed as taxable property including cars, antiques, and residential property. these will be subject to unauthorised payment taxation.
There are other alternative schemes available such as QROPS / ROPS collectively known as RNUKS.
59
Jane has total pension input of £80,000. She has fully utilised carry forward from previous years. If she has taxable income of £34,915 how much annual allowance tax charge will she pay?
Nothing
£4,443
£7,443
£8,427
Jane has a £20,000 chargeable amount. She has a £60,000 AA as she has no carry forward, and TPI of £80,000 giving her this £20,000 chargeable excess.
£2,785 will fall into basic rate tax (£37,700 - £34,915) x 20 % = £557. The remaining £17,215 will fall into higher rate x 40% = £6,886. Her annual allowance charge will therefore be £7,443.
60
CARYS LTD contributed £300,000 as an employer pension contribution into the company pension scheme in 2023/24. This has increased in the current tax year to £1,004,000. How many periods will this payment be spread over?.
None
2
3
Current year = £1,004,000
Last year = £300,000
The current year’s contribution exceeds 210% of last year’s (£300,000 x 210% = £630,000) so move on to step 2 to figure out how many periods it’ll be spread.
110% of last years contribution is £330,000. Therefore excess for the current tax year will be the amount greater than this, so £674,000 (£1,004,000 - £330,000).
This excess is well above £500,000, so will be spread for tax relief. This excess falls into Band 1, so relief will be spread over 2 accounting periods.
61
Paul has a gross salary of £25,000, and Eric has £30,000. Both contribute 5% annually into registered pension schemes. Paul pays contributions gross; Eric receives tax relief at his highest marginal rate up-front. Which of the following statements are true?
They both contribute to retirement annuity contracts.
They are both members of a DC occupational scheme.
Paul has a retirement annuity contract, Eric a DC occupational scheme.
Eric has a retirement annuity contract, Paul a DC occupational scheme.
Paul has a retirement annuity contract, Eric a DC occupational scheme.
Retirement annuity contract tax relief is given through the ‘relief through a claim’ method. This means that Paul will pays his contributions gross and all tax relief will be reclaimed through self-assessment.
Eric must be a member of a DC occupational pension scheme as he receives tax relief at his highest marginal rate upfront.
62
James earns £280,000 this tax year and has carry forward available of £30,000. How much could be paid into his SIPP this year without a tax charge?
£80,000
£50,000
£30,000
£10,000
£80,000
The answers available help you work out which is most likely to be the correct one. James appears to have adjusted income of more than £260,000. On the assumption that his threshold income is more than £200,000, his annual allowance will be tapered to £50,000 (£280,000 - £260,000 ÷ 2 = £10,000. £60,000 - £10,000 = £50,000). Add to this his carry forward of £30,000 and that gives £80,000.
63
Peter’s contribution will be grossed up by 20% tax relief as his personal pension plan will use the relief at source tax relief method. £18,000 ÷ 0.80 = £22,500.
Employer contributions are paid gross.
£22,500 + £10,000 employer contribution = £32,500 total pension input
£32,500
64
Ellie is an active member of a DB scheme. She has a starting salary of £22,000, 16 years’ service at the start of her pension input period, and £25,000 salary at the end. Her total pension input will be calculated using a valuation factor of…
10:1
16:1
20:1
25:1
16:1
Total pension input for a member of a DB scheme is calculated using a valuation factor of 16:1.
This is used to capitalise the increase in the pension entitlement in the relevant pension input period.
65
Jeff is self-employed. His net profits in 2023/24 were £45,000 and he made a lump sum pension contribution of this amount in 2024/25. His accountant has now informed him that his net profits for the current tax year have fallen to £40,000. What tax treatment will the excess £5,000 have?
A 20% tax charge.
He can carry forward £5,000 to 2025/26.
A 40% tax charge.
He can carry back £5,000 to 2023/24.
A 20% tax charge.
Jeff will be taxed on the £5,000 excess at his marginal rate. He is a basic rate taxpayer, so this will be at 20%.
66
Jack is aged 57, and has two DC pensions, a £150,000 personal pension, and a £357,000 self-invested personal pension. He has £22,000 in total annual contributions. He has crystallised his personal pension, taken £37,500 as PCLS, and as planned, recycled £20,000 as an SIPP contribution. This means that…
the £20,000 will be classed as unauthorised.
the £37,500 will be classed as unauthorised.
the £150,000 will be classed as unauthorised.
None of Jack’s personal pension will be classed as unauthorised.
the £37,500 will be classed as unauthorised.
All Jack’s PCLS will be taxed as an unauthorised payment. He has failed all four conditions set down by HMRC. This recycling was pre-planned, the PCLS is more than £7,500, both 30% conditions have been met, and the contribution was made by Jack.
67
Andi is employed and a member of a company pension scheme. She is considering the use of salary sacrifice. In terms of additional pension scheme contributions…
Andi’s employer will always add in any NIC savings.
Andi’s employer could add in any NIC savings.
Andi will always add in any NIC savings.
Andi and her employer could add in any NIC savings.
Andi and her employer could add in any NIC savings.
Salary sacrifice means that Andi will save on income tax and NICs, her employer will save on their employer’s NICs.
The NIC savings for both Andi and her employer could be added into her pension as additional contributions.
Option D. gives you the most comprehensive answer for the question asked. Though option B. is also correct!
68
John has made a £25,000 in-specie contribution into his self-invested personal pension (SIPP). He is a higher rate taxpayer. What is the upfront tax relief available on an in- specie SIPP contribution?
0%.
20%.
25%.
40%.
0%
In-specie contributions can still be made but they no longer qualify for UPFRONT tax relief.
They do get tax relief such as capital gains or income tax free tho in the fund itself
69
What is a pension credit?
A pension credit can be awarded where a couple divorce and pension sharing or splitting is chosen as part of the divorce settlement. The member will suffer a pension debit if the courts award a pension credit to the ex-spouse.
A pension credit is also a form a state benefits (do not confuse the two)
This enhancement is only available if the pension credit was either awarded pre-A-Day, or awarded post-A-Day but against benefits already in payment
70
A pension credit can be awarded where a couple become divorced and pension sharing, or splitting is chosen as an appropriate part of the divorce settlement.
A pension credit is also a form a state benefits (do not confuse the two)
There are two parties to a divorce:
The member who has the pension scheme.
The ex-spouse who is seeking a share of this scheme.
The member will suffer a pension debit if the courts award a pension credit to the
ex-spouse.
71
What is the 2.7.3: Lump Sum Allowance (LSA)?
What is taken into account when assesing the LSA (these are called relevant benefit crystallisation events)
The LSA is total amount of tax-free lump sums that can be paid to an individual during their lifetime, before marginal rate taxation arises.
Relevant benefit crystallisation events that are used to see if someone has exceeded their LSA =
- PCLS
- Tax free cash element of a UFPLS
- The tax free element of a stand alone lump sum (An SALS is a special type of lump sum payable for certain pension scheme members who had benefits in schemes on 5th April 2006.
Each time you take one of these tax-free lump sums from your pension, you will use up some of your LSA. The current LSA limit is £268,275, but it could be less than this if you have already taken tax-free lump sum pension benefits before 6th April 2024, or higher if you have any LTA protection (we will have a look at this shortly).
Any excess above the LSA is now referred to as a Pension Commencement Excess Lump Sum (PCELS). A complicated name but the theory is simple. Any excess is taxed at the individual’s marginal rate of income tax, the same as the rest of the pension withdrawal. So 20%, 40%, or 45% depending on what rate of taxpayer the recipient is.
There are some tax-free payments that do not count towards the LSA, so even if you receive one of these, it will not use up any of your LSA. These are:
Trivial commutation lump sums.
Winding up lump sums.
Small pot payments (payments under £10,000).
One of the big differences between the LTA and the new allowances, is that the LTA is applied regardless of how you took money from your pensions…taxable lump sums / taxable income / tax-free lump sums. The new lump sum allowance (LSA), and lump sum and death benefit allowance (LSBDA), only look at any tax-free lump sums you take, either during your lifetime or after you’ve died.
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What is the Lump Sum and Death Benefit Allowance (LSDBA)
THE LSDBA ONLY CARES FOR THE TAX FREE PART THAT IS TAKEN (LOOK AT EXAMPLE 2.34)
The LSDBA the total amount of TAX - FREE lump sums that can be paid to an individual during their lifetime or on death, before marginal rate taxation arises. The current LSDBA limit is £1,073,100, but it could be less if you have already taken pension benefits before 6th April 2024, or higher if you have any LTA protection.
Benefits that exceed the LSDBA are liable to income tax at the recipient’s marginal rate.
The following lump sums are ‘relevant benefit crystallisation events’ (RBCEs), and count towards the LSDBA:
Same RBCEs as LSA:
- PCLS
- Tax free cash element of a UFPLS
- The tax free element of a stand alone lump sum
+ benefits paid tax free pre age 75 if due to a serious health lump sum
+ tax free lump sum death benefits payable in event of death pre age 75
WHY ITS CALLED THE lump sum AND death benefit allowance
What doesn’t count towards LSDBA:
(Even if one of these is paid, it will not use up any of your LSDBA) These are:
- Charity lump sum death benefit.
- A trivial commutation lump sum death benefit.
- Lump sum death benefits or serious ill-health lump sum death benefits, paid after the age of 75.
- Lump sum death benefits from funds already crystallised before 6 April 2024.
- Tax free lump sums payable in the event of death if below age 75
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As we have just seen, benefits crystallised prior to 6th April 2024 are valued and deducted from the LSA and LSDBA. Where the individual did indeed receive 25% PCLS / tax-free cash at the time, the standard calculation will give a fairly accurate figure as to the reduction due.
In certain circumstances however, the standard calculation could result in the LSA and LSDBA being reduced by more than is required. For example:
if benefits had been crystallised when the lifetime allowance was below £1,073,100 (from 2016/17 to 2019/20).
if the member was in a DB scheme but didn’t commute pension for their full tax-free cash entitlement.
if they had transferred uncrystallised benefits to a QROPS – LTA will have been used up without any tax-free cash being paid.
if the individual had taken benefits from a scheme including disqualifying pension credits in respect of pension sharing.
if less than 25% PCLS / tax-free cash had been taken at a previous benefit crystallisation.
If this is the case, the individual can apply for a TTFAC to ensure the reductions in the LSA and LSDBA are for the actual amounts of tax-free cash taken before 6th April 2024, rather than an assumed 25% of their LTA usage.
To put it simply: In general, if your tax-free amounts of PCLS and UFPLS pre-April 2024 are less than £1,073,100 x % of LTA used x 25%, you'll get more LSA and LSDBA if you apply for the TTFAC.
A word of warning - once an individual chooses to take the TTFAC calculation route, they cannot go back to the standard calculation method. So before requesting a TTFAC it is paramount that appropriate calculations are fully completed to determine whether it will actually improve the allowances available!
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Income increases post esclation are known as what?
Escalation
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The minimum age for individuals in normal health crystallising pension benefits is now known as normal minimum pension age (NMPA).
Currently is 55
Set to rise to 57 in 2028 and rise to 58 in 2024
THERE IS ALWAYS A 10 YEAR GAP BETWEEN THE State pension age and the Normal Minimum Pension Age
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What happens if a member accesses pension benefits earlier than NMPA?
This will be classed as an unauthorised payment with all the associated taxation!
There are two situations for individuals in normal health where benefits may be crystallised before age 55 without being classed as unauthorised. These are ‘contractual rights’ and ‘special occupations’.
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There are two situations for individuals in normal health where benefits may be crystallised before age 55 without being classed as unauthorised. These are ‘contractual rights’ and ‘special occupations’.
What are they?
Contractual rights =
This relates to individuals who are members of an occupational scheme, who had a contractual right to crystallise benefits earlier than 55, as at 10th December 2003.
Such individuals retain this right as long as:
-The scheme rules permit this earlier retirement.
-They crystallise all scheme benefits in full.
Special occupations =
Certain occupations have the right to crystallise pension benefits earlier. Rights usually relate to personal pension plans and retirement annuity contracts. These include golfers, athletes, and jockeys as examples where working past a certain age is not realistic.
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those with a protected pension age below age 50 are subject to a reduced LSA, if benefits are taken before the normal minimum pension age (55). In these circumstances, the LSA is reduced by 2.5% for each complete year before age 55. Someone with a right to retire at, say, 35 is 19 complete years earlier than 55, not 20.
This 2.5% reduction does not apply to individuals with contractual early retirement rights.
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What is secured income?
Exactly as it sounds. It is guaranteed income, paid for as long as the individual lives. It can take two forms: a scheme pension (usually from a DB scheme) or a lifetime annuity (using a DC fund value).
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What is an Uncrystallised Funds Pension Lump Sum (UFPLS)?
introduced as part of pension freedoms. It allows an individual to access some or all their uncrystallised pension funds without designating funds to drawdown. This is known as an Uncrystallised Funds Pension Lump Sum or UFPLS.
25% of the lump sum paid will usually be tax-free (again, subject to sufficient LSA), with the remainder taxable at the individual’s highest marginal rate of income tax.
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What is drawdown pension?
Drawdown pension used to be known as unsecured income. The pension fund has been crystallised but remains invested (hence the term ‘unsecured’). Income is then drawn directly from the fund either through encashment of units and/or through the purchase of short-term annuities.
2 types -
Capped drawdown, where income is limited (no new plans available post 5th April 2015) to 150% of GAD rates.
Flexi-access drawdown (FAD), where withdrawals are unlimited.
With both versions tax is deducted at source through a form of PAYE administered by the provider.
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What is trivial commutation?
This is where individuals with smaller pension funds or benefits can commute them for cash. This avoids small values sitting in pension schemes costing providers a lot to administer.
Trivial commutation / small pots payments are not classed as ‘relevant benefit crystallisation events’. As a result they do not use up any of the individual’s LSA or LSDBA. Even though no LSA or LSDBA is used, the individual must have some LSA remaining for trivial commutation (this is not required for small pots).
As individuals now have access to their DC pensions as cash, using either UFPLS or FAD, there is no real need to offer trivial commutation for any schemes types other than DB. In this context, ‘DB’ also includes benefits from an in-payment money purchase (DC) in-house scheme pension as well as the DB benefits, up to the maximum of £30,000 value.
As a result, this type of triviality was abolished for most DC schemes from 2015.
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Peter is crystallising his benefits in the current tax year and has registered for primary protection. He has a PPF of 0.3. This means that his LSDBA will be…
£1,800,000 + £540,000
£1,500,000 + £450,000
£1,250,000 + £375,000
£1,250,000 + £250,000
£1,800,000 + £540,000
Having registered for primary protection, Peter’s PPF of 0.3 will be applied to the old, underpinned lifetime allowance of £1,800,000.
A PPF of 0.3 means that he is also entitled to a further 30% on top, in order to calculate his own LSDBA.
30% x £1,800,000 = £540,000 + £1,800,000 = Peter’s LSDBA.
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John has the following types of RPS:
DC OPS: £625,000, AVC: £450,000, FSAVC: £350,000
If he has not registered for any form of TFC protection, what is the maximum PCLS available to him if he crystallises these pensions in in the current tax year?
£356,250.
£268,275.
£263,750.
£175,750.
£268,275.
John’s PCLS is restricted to the lower of the LSA, or 25% of his pension funds. The lower here is the LSA, so £268,275. If he takes any more as cash, this will be subject to an income tax charge in the current tax year.
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Penny has been in receipt of a £15,000 annual scheme pension since 2005. This has increased with escalation to £22,000 by the current tax year. If Penny has not crystallised any other pension benefits since, but has an RBCE in this tax year, what amount of her LSA will already have been deemed to be used?
£93,750
£375,000
£137,500
£550,000
£137,500
Where only pre-6th April 2006 benefits are in payment, the LSA and LSDBA will be reduced by:
(25 x current value of pension in payment) x 25%.
Penny’s scheme pension will therefore be deemed to have a used up: £550,000 (£22,000 x 25) x 25% = £137,500 of her LSA and LSDBA.
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Penny has been in receipt of a £15,000 annual scheme pension since 2005. This has increased with escalation to £22,000 by the current tax year. If Penny has not crystallised any other pension benefits since, but has an RBCE in this tax year, what amount of her LSA will already have been deemed to be used?
£93,750
£375,000
£137,500
£550,000
£137,500
Where only pre-6th April 2006 benefits are in payment, the LSA and LSDBA will be reduced by:
(25 x current value of pension in payment) x 25%.
Penny’s scheme pension will therefore be deemed to have a used up: £550,000 (£22,000 x 25) x 25% = £137,500 of her LSA and LSDBA.
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Jenny is a member of a defined benefit (DB) scheme. She registered for both primary and enhanced protection in 2007. She has recently changed employment and has been auto-enrolled into her new employer’s pension scheme.
How does this affect Jenny’s transitional protection?
Neither protection will be lost.
Jenny registered for enhanced protection back in 2007. This means that following March 2023 budget changes she can now have a cessation event, such as joining another pension scheme, without losing her enhanced protection. With primary protection she can continue to make contributions / accrue benefits regardless.
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David has a £20,000 DB scheme value and a small pension pot of £2,000 that he wishes to take under trivial commutation rules. How much tax would he have to pay as an ART payer?
None – it would all be tax-free.
£3,300
£6,600
£7,425
£7,425
As long as David is at least aged 55, he can trivialise these RPS benefits, as they are within permitted limits. 25% would be tax-free (£5,500) leaving £16,500 taxable at David’s marginal rate, so x 45% = £7,425.
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Joe is married to Stacey. They have two daughters, Maggie 24, and Melanie 18. If Joe dies leaving un-crystallised pension funds, what dependant pensions could be paid?
Only Stacey could receive a pension for her lifetime.
Stacey, Maggie, and Melanie will receive pensions for their lifetimes.
Stacey will receive a pension for life, Maggie and Melanie for another 5 years.
Stacey could receive a pension for life and Melanie a pension for another 5 years
Stacey could receive a pension for life and Melanie a pension for another 5 years
Stacey is Joe’s spouse so can receive in theory a pension for as long as she lives, depending on scheme rules. It may cease if she remarries.
Of Joe’s daughters, only Melanie is aged under 23, so she could receive a dependant pension for five years unless she could show continued financial dependence. Maggie, unless physically or mentally disabled, or financially dependent, could not receive a pension as she is over 23 years old.
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David has had a £22,000 level scheme pension in payment since 2003. He also took an UFPLS of £523,100 in 2022, of which 25% was tax-free. How much of the LSDBA does he have left? He has no transitional protection.
£0
£148,100
£150,100
£333,100
£0
Both pensions would have been tested against the LTA when David took the UFPLS.
The scheme pension would have been deemed to have used £22,000 x 25 = £550,000 of his LTA.
This left £523,100 of his LTA remaining. This was all used by the UFPLS.
If 100% of the LTA has already been used up prior to 6th April 2024, the LSA and LSDBA will be set to £0. This means that no further tax-free cash will be available either as a lump sum whilst alive, or upon death.
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Is Trivial commutation / small pots payments classed as ‘relevant benefit crystallisation events’?
No so as a result they do not use up any of the individual’s LSA or LSDBA.
Even though no LSA or LSDBA is used, the individual must have some LSA remaining for trivial commutation (this is not required for small pots).
