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LP2 > Chapter 9- Tax wrappers 2 > Flashcards

Chapter 9- Tax wrappers 2 Flashcards

1
Q

What are Master Trust and Automatic enrolment?

A

Automatic enrolment began on 2012 for large employers
-common way to provide workplace pension scheme through MASTER TRUST

-MASTER TRUST= multi employer pension scheme with one board of independent trustees.
-benefits of MASTER TRUST= it is less costly and provides more protection and governance
-each employer has its own division

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2
Q

What are National Employer Savings Trust (NEST)?

A

one of the MASTER TUST in the UK which supports the introduction of automatic enrolment (established by law)

PENSIONS ACT 2008- obligation to accept all employers that want to use it as a pension scheme

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3
Q

Define the eligible jobholder under automatic enrolment?

A

employee who is aged between 22-state pension age and earns over £10,000 a year MUST be auto enrolled with a choice to opt out

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4
Q

Define the non-eligible jobholder under automatic enrolment?

A

Employee NEEDS to be provided info on how to opt in if they are:
- aged between 16-21 or between State Pension Age-74 and earn more than £10,000 a year
- aged between 16 and 74, and earn between the lower earnings of £6,240- £10,000 in 2022/23

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5
Q

Define entitled-workers under automatic enrolment?

A

Employees aged 16-71 that earn less than £6,240, must be provided info on how to opt in
-Employers NOT obliged to meet minimum contribution

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6
Q

The process of STAGING DATE for Automatic enrolment?

A

-Employer is given a staging date by Pensions Regulator
-employers must have implemented changes required under workplace pensions reforms and to automatically enrol all eligible jobholders

STAGE DATE is driven by
employers included on the PAYE system ON 1ST APR 2012

When STAGE DATE approaches= the employer must write to their employees on what automatic enrolment means for them

AFTER 1ST APR 2012- staging dates for new employer coincides with the date by which their PAYE duties have started

Postponement= Employers can delay the date they enrol an employee into a pension by up to 3 months from the deadline given to them by the pensions regulator
-Can be delayed once and must give impacted employees a postponement notice

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7
Q

Which employers are exempt from Automatic Enrolment?

A

It isn’t a requirement for all employers to auto-enrol. Exemptions are given to employers that:

  • consist only of a sole director; and
  • consist of a number of directors, but of whom no more than one have an employment contract
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8
Q

What are the contributions for Automatic enrolment?

A

-Employer has to pay minimum amount for each members QUALIFYING earnings into their workplace pension schemes between £6,240 and £50,270
Total minimum contribution is 8%

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9
Q

What are the different type of asset classes that can meet different investment objectives under a pension scheme?

A

-Cash= easy to access (suitable for Pension Commencement Lumpsums (PCLS) at retirement ALSO helps provide income in early years from a ‘Drawdown Pension Arrangement’

-Bonds= can match maturity date of bond with retirement providing income and capital at the time of retirement

-Equities=Provides real return over long-term which is suitable for a ‘Drawdown’ portfolio, growth and income maintained

-Property= provides diversification within pension fund, maintains value during market volatility and provides ongoing income

ASSET ALLOCATION= portfolio needs to include different asset classes

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10
Q

What is life-styling under pension?

A

Option is provides where the mix of investments automatically move from equities to BONDS and CASH near retirement

life styling works as:
-switching 5-10 years before retirement
-locks in gains on investment and reinvests in bonds and cash
-Retiree may take full (PCLS)= Target mix of investment at retirement is 75% GILTS and 25% CASH
-GILTS within the fund provides a hedge against falling annuity rates as annuity rates are calculated from gilt yields.

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11
Q

What are the disadvantages of life-styling?

A

-switch occurs automatically at pre-set times
-Doesn’t take into account when individual will decide to retire (either late or early)
-not suitable if member wants to phase retirement after a number of years or go into Drawdown

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12
Q

What are Target date Funds?

A

Similar to life-styling but the DIFFERENCES ARE:
-it provides more FLEXIBILITY as each fund has its own target date
-gradual shift to capital preservation near retirement date
-multi-asset funds= mix of domestic and international
-investment management more likely to take advantage of investment opportunities

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13
Q

Key Information Document (KIDS) requirement on Pension Schemes?

A

Pension scheme provider MUST provide certain basic info so customers can understand the scheme.

-OCCUPATIONAL scheme= details on how to join, eligibility conditions, rate of contribution and retirement date provided

-DEFINED CONTRIBUTION scheme= must provide info on investment option and investment charges

-PERSONAL pension= KID that sets out key info on offered investment products, illustration shown on amount of annual pension that may be received at retirement (which is entirely based on the amount that is intended to be contributed or transferred into the pension). ALSO SHOWS effects of the charges taken on the investment growth over the term of the investment, using a reduction in yield

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14
Q

What is the meaning of CRYSTALISATION when drawing pension benefits?

A

Not been necessary to retire in order to take the benefits from an employer sponsored retirement benefits scheme

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15
Q

What is a Pension Commencement Lump Sum?

A

-some members will choose to take a PCLS
-Scheme decides on the amount payable
-payment CANNOT exceed 25% of the value of the fund
-Paid FREE OF TAX
-if value of PCLS is over LIFETIME ALLOWANCE then excess is taxed at 55%
-Individual can receive a lump sum and invest some of it to provide an income or use it to pay planned purchases

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16
Q

What are the two types of Pension Commencement Lump Sum?

A

-Small Pension Pot Commutation
-Trivial Commutation

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17
Q

What are the features of Small Pot Commutation?

A

-pension scheme benefits of less than £10,000 can be taken as a lump sum
-Threshold of 10k applies to each scheme being commuted
-Maximum of 3 NON-OCCUPATIONAL schemes being commuted
-no limit on OCCUPATIONAL schemes being commuted

Eligibility= at least 55 years of age or in ill health
-NOT TESTED AGAINST LIFETIME ALLOWANCE

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18
Q

What are the features of Trivial Commutation?

A

-Available to customers of DEFINED BENEFIT and DEFINED CONTIBUTION schemes
-Can take benefit as a lump sum if benefits are less than £30,000
-All Trivial Commutation MUST be taken WITHIN 12 MONTHS
-NO MAXIMUM NUMBER on Trivial Commutation Lump Sum that can be taken

Eligibility= at least 55
-MUST have available LIFETIME ALLOWANCE

If these conditions are met=
-member can take 25% of any uncrystallised benefit TAX FREE
-Remainder is liable to tax through PAYE at marginal rate of tax when using BOTH forms of commutation

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19
Q

What is an Uncrystallised Fund Pension Lump Sum (UFPLS)?

A
  • for those OVER 55 and have a DEFINED contribution scheme to access their uncrystallised pension fund as a lump sum payment
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20
Q

What are the features of Uncrystallised Fund Pension Lump Sum (UFPLS)?

A

-NO LIMIT to UFPLS payments a member can take (depends on the remaining value of the fund that can be accessed)
-payment TESTED AGAINST LIFETIME ALLOWANCE
-excess is taxed at 55%

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21
Q

What is the tax treatment on Uncrystallised Fund Pension Lump Sum?

A

UNDER 75= receive 25% of UFPLS payment TAX FREE, excess is liable to tax

OVER 75=Tax treatment driven by whether the member has remaining LIFETIME ALLOWANCE.

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22
Q

What are the Pros and Cons of Uncrystallised Fund Pension Lump Sum?

A

Pros:
-easy to access
-Simple

cons:
-can cash on pension too early without thinking about its longevity in retirement

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23
Q

What is a defined benefits scheme

A

Only have access to a scheme pension when they have reached retirement age

benefits driven by length of service, salary and accrual rate

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24
Q

what are the two types of defined contribution schemes?

A

-Lifetime Annuity=
payable by chosen insurance company

-Drawdown Pension=
‘Drawdown’ income from funds from a series of payments.
(There are two types of Drawdown Pension. 1. Capped drawdown. 2. Flexible Pension Drawdown Contract or temporary annuities

25
Q

What are the features of Capped Drawdown Pension?

A

A way for individual to take benefits from pension WHILE it remains invested. Withdrawals are subject to maximum income level which is set at 150% by Government Actuary’s Department (GAD) tables
-NO LONGER OFFERED AFTER 6th APR 2015
-those who already have arrangements in place can continue or convert to flexi-access drawdown
-NOT subject to MPAA (Money Purchase Annual Allowance)

26
Q

What are the features of Flexi-access Drawdown Pension?

A

Can withdraw any amount at any time
-Only option available after 6th Apr 2015
-MPAA is only triggered once income is taken from the arrangement
-If they only take tax-free cash and set their income levels to 0, can retain the standard allowance of £40,000
-Tax deducted via PAYE

27
Q

What is a Lifetime Annuity?

A

Guaranteed income for life bought by the money saved in DEFINED CONTRIBUTION schemes

28
Q

What are the key features of a Lifetime Annuity?

A
  • Annuity payments can be paid monthly, quarterly, yearly

-Income IS TAXABLE

-Individual can decide on the level income they wish to receive during their lifetime

-Annuitant can choose a guaranteed annuity that makes payment for a minimum period (5-10 years) and will be paid out within that period even if they die

-Can decide whether income can be continue to be given to their kin after death at a % of the rate or choose to stop.

29
Q

The income provided through Annuity depends on value of the pension pot and the annuity rates?

A

-Annuity rates depend on life expectancy and GILT YIELDS
-If life expectancy is HIGH and gilt yield is LOW= LOW ANNUITY RATES
-Depends on additional choice included i.e. a spouse’s pension which can reduce the income provided.

30
Q

What other factors do Annuity rates depend on?

A

-Age= mortality tables will be used by insurance company

-Health and lifestyle= those with poor health/certain lifestyle can get higher income through an IMPAIRED LIFE or ENHANCED ANNUITY

IMPAIRED LIFE= those with certain medical conditions e.g. cancer or heart disease

ENHANCED ANNUITY= those with particular medical conditions and lifestyle e.g. diabetes sufferers, obese and smokers

31
Q

What do FCA require of LIFETIME ANNUITY?

A

-providers need to make their members aware if their right to an open market option which is to buy a lifetime annuity from an authorised insurer

-cons would be that it will only be paid if investor is alive= to mitigate that, it is best to purchase GUARANTEED annuity for 5-10 year term (that would still be paid after assured dies within that period)

-Lifetime Annuities DOESN’T trigger MPAA of £4,000

32
Q

What is phased retirement?

A

Allows individual to access pension benefits WHILST STILL in employment
-a portion of pension is crystallised each year to provide additional income

33
Q

What are the benefits of phased retirement?

A

-Leaves unused funds invested in the pension for potential growth

-TAX FREE cash isn’t taken as a lump sum but is available to take in the future years

-Better annuity rates with age

34
Q

What are the disadvantages of phased retirement?

A

Large amount of pension will remain invested during phase retirement

-pension fund will be exposed to investment risk and annuity rates may not match future expectations

35
Q

What is delayed retirement?

A

Able to leave pension benefits uncrystallised when they reach retirement age AS they opt to take their retirement income elsewhere e.g. savings/investments

36
Q

If member dies, pension death recipients are?

A

-nominees (nominated beneficiaries)

-survivors= refers to annuity death benefits, the individual who will continue to receive annuity income from a JOINT annuity

-successors=subsequently nominated by NOMINEE to receive pension death benefits in death nominee

-Dependent= death benefits to surviving spouse or children

If pension scheme and lifetime annuity is chosen= member must decide their death benefits when drawing benefits

If drawdown or planned/delay pension is chosen= decision of choosing survivors benefits can be deferred

37
Q

By using SIP (Self Invested Pension)

A

Individuals can manage their own investment portfolio or appoint investment managers to look after them

-SIPPs have become common in DEFINED CONTRIBUTION market place.

-Most platforms offer SIPP with investment choice in the collective funds available

38
Q

What are the other uses of SIPP?

A

-used as a wrapper to manage invested portfolio of stocks and shares and bonds

-can invest in commercial property

-a way to finance the member’s business such as purchasing private company shares

-can access pension income options such as drawdown and phased retirement

SIPP DOES NOT receive tax advantages from certain assets; wine, classic cars art and antiques

39
Q

What are the features of SMALL SELF-ADMINISTERED SCHEMES (SSASs)

A

-occupational defined scheme AIMED at directors and senior employees

-SSASs have less than 12 members and ALL of them must be Trustees

-ability to lend up to 50% of the schemes asset to sponsoring employees that can help the growth of the business

-wider choice of investments
-can invest in commercial property

40
Q

What are the key features of ISA?

A

-wrapper where savings and investment can be held in free of uk INCOME tax and CGT.

-ISAs can only be generated HMRC approved account managers

-There is no personal reporting to HMRC to include details of ISAs in tax return

41
Q

Eligibility criteria for ISAs

A

-only individuals can subscribe to an ISA not joint accounts
-have to be over 16
-must be resident in the UK, or crown employee serving overseas
-must not have subscribed to another ISA of the SAME type in that tax year or exceed subscription limit

42
Q

What is the subscription limit on ISA?

A

£20,000 limit is spread across all: cash ISA, Stocks & Shares ISA and Life-time ISA.

-In each tax year Investors may only subscribe to one of each type of ISA

-ISA managers are required to submit tax returns to HMRC

43
Q

What are the main uses of a CASH ISA?

A

Tax-free savings and have funds available for:

-long term saving
-emergency fund
-an alternative to a Standard Savings account
-can be restrictions on the type of investments that can be held in a CASH ISA
-Low risk but there can be a risk of a bank failing= FSCS £85,000

43
Q

What are the main uses of a CASH ISA?

A

Tax-free savings and have funds available for:

-long term saving
-emergency fund
-an alternative to a Standard Savings account
-can be restrictions on the type of investments that can be held in a CASH ISA
-Low risk but there can be a risk of a bank failing= FSCS £85,000

44
Q

What is the main purpose of a Stocks and Shares ISA?

A

A wide range of assets can be held
The main investments that can be held in the Stocks and Shares ISA are:

-shares that are listed on a recognised stock exchange including AIM

-bonds that are officially listed on a recognised stock exchange,
Including UK Gilts or comparable securities insured by governments of other EEA countries, Separate Trading of Registered Interest and Principals (STRIPS)

-Units and shares in UNIT trusts and OEICs authorised by FCA

45
Q

What are the features of Innovative Finance ISA?

A

Based around the purpose of peer-to-peer lending

-P2P can be made to 3 key sectors: personal loan, small business loan and property loans

-The ISA must be authorised by the FCA

-No banks/building societies are involved

-interest received through this type of ISA is tax-free

-Deposits in Innovative Finance ISA are NOT protected by FSCS

46
Q

What’s the purpose of a LIFETIME ISA (LISA)?

A

-Can be open by those 18-40 only
-tax efficient savings towards deposit on a first home or retirement
-can make make contributions till the age of 50

47
Q

What are the features of a Lifetime ISA (LISA)?

A

-A combination of stocks/shares can be held

-annual subscription of £4,000

-Gov tops up savings with additional 25% bonus contribution (up to £1,000 per tax year)

-if individual accesses funds BEFORE age 60 for any other purpose other than buying a first home= 25% charge will be applied on the value of withdrawal

-charges also apply to value of any transfers made from LISA to another ISA

-no exit charges will be incurred if withdrawal is for the purpose of buying a first home BUT must be valued LESS than £450,000

48
Q

ISA Withdrawal terms

A

-Can withdraw a part all of their fund that is held in an ISA

-can replace funds that are withdrawn as long as it is done within the same tax year

49
Q

Transfer conditions on ISA

A

-Investor can transfer ISA whenever they want and this needs to be included in the managers T&Cs

-ISA managers aren’t obliged to transfer the whole of previous years ISA subscription

-Tax benefits are preserved

50
Q

Closure terms on ISA

A

-ISA account can be closed at any time

when investor dies no further funds can be paid into the ISA. Tax benefit will continue till:

-the closure of ISA
-completion of administration of the deceased estate
-3 years and 1 day after death

Deceased ISA benefits can be passed onto spouse with an additional ISA allowance

51
Q

What is a Junior ISA (JISA)?

A

2 types of JISA-

Cash JISA and Stocks and Shares JISA

-a child can only hold up to 2 JISAs throughout childhood

-subscription limit is £9,000

-NOT available to children who already have a CTF (child trust fund)

-withdrawals aren’t allowed until a child reaches 18 or is terminally ill

52
Q

What is a Child Trust Fund (CTF)?

A

-launched on 06/04/2005 and was available for children born after 01/09/2002

-GOV would make contributions on the child’s behalf
-in 2010 GOV contributions stopped

After introducing JISA-
-no new CTFs were opened
-06/04/2005 CTFs were permitted to be transferred to JISA

53
Q

What are investment bonds?

A

-Set up as single premium WoL (whole of life) policies but is mostly focussed on investment

-death benefits are minimal

-investment bonds are invested in collective investments (e.g. OEICs and Unit Trust)

-capital gains are subject to income tax

54
Q

What’s Tax-deferred Income Withdrawals (related to Investment bonds)?

A

-investor can take a tax-deferred income withdrawal from an investment bond each year (5% of initial investment up of to a maximum of 20 years after it has been made)

-income is NOT tax free

-value of all tax deferred withdrawal is added to the gain on encashment to determine if withdrawal will attract income tax

-tax deferred withdrawal are CUMULATIVE (5% can be carried forward to the following year)

55
Q

What’s the tax treatment on ONSHORE bonds?

A

Only available to UK residents

  • assumed that 20% tax has been paid within the underlying investment funds

-Investor only have a tax liability on gains if they are higher rate or additional rate tax payers
20% higher
25% additional

56
Q

What’s the tax treatment on OFFSHORE bonds?

A

Available to BOTH uk and non uk residents

-no tax is paid within the Bond
-investments can grow at a faster rate
-liable to income tax
20% basic
40% higher
45% additional

Gains on excess withdrawals from an investment bond come last in the order of taxation which can push an individual to a higher income tax bracket
-top slicing is used to mitigate this

57
Q

What is ‘top slicing’

A

Spreading tax liability on a bond over its lifetime

-can also be used in event of death or assignment for money or moneys worth

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