Chapter 8- Tax wrappers: pensions

Question 1

What is the State Pension Age (SPA)?

Answer 1

-receive pension when reaching SPA
-current SPA is 66

-SPA will rise to 68 between 2037-2039 (change applicable for those born between 06/04/1970- 05/04/1978

Question 2

What is the New State Pension?

Answer 2

-2022-2023 it is £185.15 per week

-to be eligible you need NIC record of 35 years

-those who haven’t reached SPA can bridge the gaps in their NIC record by paying additional CLASS 3 CONTRIBUTIONS

-SPA is in line with ‘triple lock system’ (higher earnings, CPI and 2.5%)

-2022-2023 pension is increased with double lock= CPI and 2.5%

Question 3

State pension Statements

Answer 3

-Can request state pension statements from Dep of work and pension

-provides information about basic and additional pension that can be payable based on contributions

-shows number of qualifying years that have accumulated

-state pension statement can be obtained via post, telephone or internet using the form BR19.

Question 4

What is the maximum personal contribution that is eligible for tax relief?

Answer 4

-greater of £3,600 or 100% of ‘relevant UK earnings’ each year

Question 5

Who comes under relevant UK individual?

Answer 5

-under 75

-relevant UK earnings chargeable to INCOME TAX in that year

-resident in the UK during that year OR 5 years before contribution was made OR when they became member of pension scheme

-they or spouse have earnings in that year from overseas subject to INCOME TAX

Question 6

What are the relevant UK earnings?

Answer 6

Income arising from:

-employment
-exercise of trade, profession or vocation
-patent rights that are treated as earned income
An overseas Crown Employment is subject to INCOME TAX

-DIVIDEND INCOME NOT included as part of relevant earnings

Question 7

What are the types of tax relief on pensions?

Answer 7

NET PAY METHOD-
-Gross pay is reduced by amount of contribution BEFORE tax is deducted

Pension Relief At Source (PRAS) METHOD-
-contributions are made net of basic rate tax with the pension provider claiming tax relief from HMRC

At Source Method-
-contributions to personal and stakeholder pensions
-contributions to OCCUPATIONAL schemes

Question 8

What are employers contributions?

Answer 8

-there is no monetary limit on employers contribution for an employer

-BUT HMRC decided if the contributions are too excessive for a particular employee or not

-contributions are paid GROSS, amount offset as business EXPENSE

Question 9

What is an annual allowance for pension scheme members?

Answer 9

-HMRC considers the annual allowance to see if member is entitled to keep ALL of the tax relief or whether it needs to be ‘returned’ act to HMRC in the form of ANNUAL ALLOWANCE CHARGE at rates of income tax (20%, 40%, 45%).

-(MPAA) annual allowance is £40,000 CAN be reduced to £4,000 if member has income OVER £312,000

Question 10

What is a Pension Input Period?

Answer 10

-contributions to a pension are MEASURED for purposes of a ANNUAL ALLOWANCE test

-from 2016/17 all pension input periods fall in line with the tax year

-GOV introduced MPAA. Restricting allowance to £4,000 for money purchase savings made in 22/23

Question 11

What are the triggers of Money Purchase Annual Allowance (MPAA)?

Answer 11

-member having funds from flexi-access drawdown fund

-taking an uncrystallised funds pension lump sum (UFPLS)

-where capped drawdown plan is converted to flexi drawdown

-annual allowance can be carried forward

Question 12

What is a Lifetime Allowance?

Answer 12

-Allowance is set as £1,073,100 which increases in line with CPI but has been frozen till 2026

-if benefits are taken BEFORE 75 then assessment is taken to see if value is over lifetime allowance

Question 13

Assessing Lifetime Allowance?

Answer 13

If all the benefit value is within lifetime allowance= NO tax liability

If value is over lifetime allowance the charge would be:
-lump sum= 55%
-income=25% but income is subject to income tax too

Question 14

Income benefits are valued in the following ways:

Answer 14

-BEFORE 06/04/06 is multiplied by 25

-after 06/04/06 is multiplied by 20

Question 15

When are pension benefits taken at FACE VALUE?

Answer 15

-Pension Commencement Lump Sum (PCLS) is taken AFTER 06/04/06

-Funds designated to Drawdown

-Funds which are used to purchase LIFETIME ANNUITY

-Funds used to provide an Uncrystallised Fund Pension Lump Sum (UFPLS)

-benefits taken before the mentioned dates would NOT be tested against Lifetime Allowance

Question 16

What’s the tax treatment on Pension investments?

Answer 16

-No income tax on interest/dividends on gains from investments

-NO CGT when assets are disposed

Question 17

What are the retirement benefits on PENSION INVESTMENTS?

Answer 17

INCOME benefits=
-income tax payable via PAYE system
-state pension is taxable and paid gross

LUMP SUM BENEFITS=
-all registered pensions can pay up to 25% of the value of the benefits as a cash lump sum
-Is paid free if tax BUT if it’s over lifetime balance then taxed at 55%

Question 18

What are the features of ill-health early retirement pension?

Answer 18

• early retirement can be taken in event of ill-health

can be calculated based on:
-service to the date of ill-health early retirement, without penalty

-prospective service to scheme’s normal retirement and salary at the date of ill health early retirement without penalty

IF members expectation of life is LESS than 12 month= pension can be commuted as a LUMP SUM

Question 19

What are Defined Benefit Schemes?

Answer 19

Type of OCCUPATIONAL scheme provided by an employer :

-first it was based on a proportion of salary=final salary
-now its changed to ‘Career Average Earnings (CARE schemes) which is a proportion of salary averaged OVER A WHOLE CAREER
-Lower and cheaper

Question 20

What are the Two pain types of Defined Benefit Schemes?

Answer 20

PRIVATE SECTOR=
-Provides pension based on a % of final salary scheme
-employee required to contribute fixed salary
-contributions in pooled pension fund
-guaranteed nature of benefits

PUBLIC SECTOR=
-public services schemes: e.g. teachers, NHS, Civil Services

Features of Public sector:
-pension payouts are inflation protected
better treatment to members on early retirement
-Public service schemes belong to TRANSFER CLUB

Question 21

What are the Accrual Of Benefits on Defined Benefit Schemes?

Answer 21

Benefits based on 3 factors:

REASONABLE SERVICE:
-employees period of membership of the service

PENSIONABLE SALARY:
-final salary is used to calculate pension benefits
-CARE (average earnings) will be used too
-most pension schemes will pension basic salary

ACCRUAL RATE:
-benefits accrue or build up by rate for each year of membership

Question 22

What are the features of Define Benefit Schemes?

Answer 22

-Overseen by Trustees
-Normal retirement age
-contributions
-Pension Commencement Lump Sum (PCLS) can be provided or early retirement of ill-health

Question 23

Benefits on death of Define Benefit Schemes?

Answer 23

-Members fill in NOMINATION form stating beneficiaries BUT death payments are paid out on the DISCRETION OF THE TRUSTEES

LUMP SUM DEATH IN SERVICE BENEFIT:
-can pay lump sum to members beneficiaries in event of death
-maximum lump sum is unlimited (benefits paid under trust are TAX FREE)
-lump sum excess is taxed at 55% if member dies BEFORE 75
-if member dies AFTER 75= marginal rate of income tax

Question 24

Death benefits after retirement on Define Benefit Schemes?

Answer 24

-guarantee period is included, pension instalments are paid up to 10 years

-‘defined lump sum death benefit, enables payment to be paid as a lump sum

-pension can be continued to be paid to spouse/dependents at a fixed % of members pension at date of death

Question 25

What are the main types of DEFINED CONTRIBUTION SCHEMES?

Answer 25

retirement fund depends on contribution made and investment returns

-OCCUPATIONAL SCHEMES

-GROUP PERSONAL PENSION

-PERSONAL PENSIONS

-STAKEHOLDER PENSIONS= offers better value on smaller amounts but are subject to minimum standards (charges, access and terms)

-SELF-INVESTED PERSONAL PENSION (SIPP)= invest in shares and commercial property

-SMALL SELF-ADMINISTERED SCHEMES (SSAS)= employer based schemes for company directors and senior employees

Question 26

What are the eligibility and conditions of defined contribution schemes?

Answer 26

-OCCUPATIONAL SCHEMES= employer decides on eligibility

-GROUP PERSONAL SCHEMES= employer decides on eligibility, can require employee to work for a period before enrolling

-PERSONAL PENSIONS= any UK resident less than 75 years can contribute to a Personal Pension, Stakeholder Pension or SIPP (can contribute on behalf of the member). Tax relief is eligible for under 75

Question 27

What are the contribution terms under Defined Contribution Schemes?

Answer 27

OCCUPATIONAL SCHEMES= contribution levels are limited which depends on the rules of the scheme

GROUP PERSONAL PENSION SCHEMES= will have minimum level of contributions and member CAN choose to pay more

PERSONAL PENSION= individual can choose their own level of contribution

Question 28

What are the employer contributions on Defined Contribution Schemes?

Answer 28

-Pay a % of employees pensionable salary
-which is the basic salary that can include: bonuses/overtime/commission

OCCUPATIONAL SCHEME= tax at NET PAY METHOD
-contributions are taxed at Personal relief at Source method for Personal Pensions

-employer who pays contribution gross to Defined Contribution Schemes, they are deductible as a BUSINESS EXPENSE on the accounts

Question 29

What are the Death in benefit service for DEFINED CONTRIBUTION SCHEMES?

Answer 29

-Represented by Uncrystallised funds in members name at date of death

-can be used to provide pension/lump sum benefits

-TOTAL LUMP SUM IS SUBJECT TO LIFETIME ALLOWANCE if member dies BEFORE 75

-if benefit value is WITHIN lifetime Allowance= NO LIFETIME ALLOWANCE CHARGE OR INCOME TAX CHARGE

-if member dies AFTER 75 then lump sum death benefits will be taxed are marginal income tax rate