Knowledge Gaps - DCs,DBs & Tax Planning Vehicles

Question 1

What is an investment bond?

Answer 1

A wrapper which is set up as a single premium whole of life policy but is for investmen & to take an income tax efficiently.

Question 2

When would someone set up an investment bond?

Answer 2

When someone is looking for long term growth, but for when someone has used up all of their pension/ ISA contribution limits, also used for when people want to take tax efficient income from it

Question 3

How much of an income from an investment bond can be taken each year tax deferred?

Answer 3

5%

Question 4

What happens if an investor doesn’t take the 5% they are allocated to take in that tax year?

Answer 4

It can be rolled forward yearly up to a max of 20 years

Question 5

What tax rules are investment bonds subject to?

Answer 5

Income tax rules as opposed to CGT

Question 6

What is the advantage of an investor having an Investment bond with respect to CGT liabilities?

Answer 6

Not subject to CGT, so allows the CGT allowance to be used in other areas

Question 7

What happens if an investor withdraws more income over the allowance in an investment bond?

Answer 7

Subject to income tax

Question 8

What is an onshore bond?

Answer 8

Investment bonds only available to UK residents

Question 9

What is an offshore bond?

Answer 9

Investment bonds available to UK & non- UK residents

Question 10

What is the difference between onshore & offshore bonds with regard to tax paid within the bond/

Answer 10

Onshore- assumes 20% tax paid within the underlying funds
Offshore- no tax paid in the bond

Question 11

What is the difference between onshore & offshore bonds with regard to gains made from the bond?

Answer 11

Onshore- only tax liability for higher (20%) & additional rate tax payers (25%)
Offshore - Income tax paid on standard rates basic (20%) etc.

Question 12

What is top slicing and why would someone want to use it?

Answer 12

Can spread the tax laibility of an investment bond over it’s lifetime, useful for those who are on the border of a higher tax bracket and a chargeable gain would push them in to a higher bracket.

Question 13

Which class of NIC contributions can people pay to make up gaps in National Insurance records with regards to state pensions?

Answer 13

Class 3 voluntary contributions

Question 14

What 3 areas determine what the triple lock will rise by the highest each year?

Answer 14

Earnings
CPI
2.5%

Question 15

what is the maximum amount eligible for tax relief on pension contributions a year?

Answer 15

Max of £3600 or 100% of UK earnings a year

Question 16

GIve an example of a relevant UK individual with regards to being eligible to receive tax relief on pension contributions

Answer 16

This is an individual under the age of 75, who in relation
to a tax year:
* has relevant UK earnings chargeable to income tax
for that year;
* is resident in the UK at some time during that year;
* was resident in the UK both:
– at some time during the five tax years
immediately before the year in which the
contribution was made, and
– when they became a member of the pension
scheme; or
* they or their spouse have earnings for the tax
year from an overseas Crown employment subject
to UK tax.

Question 17

GIve an example of relevant UK earnings with regards to being eligible to receive tax relief on pension contributions

Answer 17

• employment, such as a salary, wages, a bonus,
  overtime or commission;
• carrying on or the exercise of a trade, profession or
  vocation (whether as a sole trader or a partner);
• patent rights and which is treated as earned
  income; or
• an overseas Crown employment, which is subject to
  UK tax

Question 18

Do dividends count as part of relevant UK earnings?

Answer 18

No

Question 19

Will someone who isn’t a relevant UK individual be able to receive tax relief on pension contributions if they make them?

Answer 19

They can make them, but won’t get tax relief

Question 20

What are the 2 ways tax relief is given on pension contributions?

Answer 20

Net pay method
Pension Relief at source (PRAS) method

Question 21

What is the net pay method with regards to tax relief on pension contributions?

Answer 21

When gross pay is reduced by the amount of the contribution BEFORE tax is deducted

Question 22

What is the Pension relief at source method with regards to tax relief on pension contributions?

Answer 22

Contributions are made net of basic tax rate (20%). then down to the pension provider to reclaim the tax relief from HMRC

Question 23

Which types of schemes would use the net pay method?

Answer 23

Occupational pension schemes

Question 24

Whcih ntypes of schemes would use the pension relief at source method?

Answer 24

personal & stakehodler pensions

Question 25

What is the benefit for an employer to make additional contributions to an employee's pension?

Answer 25

The contributions are offset as a business expense, this can give corporation tax relief if the employer is a company

Question 26

How much is the annual allowance on total contributions which qualify for tax relief?

Answer 26

£60k

Question 27

What is the purpose of the annual allowance?

Answer 27

To see if the member can keep all of their tax relief or whether some has to be returned to HMRC

Question 28

If the annual allowance has been exceeded, what is the tax on this if a member has to pay it back?

Answer 28

An annual allowance charge is paid at the member's rate of tax

Question 29

How much is the annual allowance if someone earns over £360k a year?

Answer 29

£10k

Question 30

How many annual allowances can a person carry forwards to top us a pension?

Answer 30

3 years worth

Question 31

What is the Money Purchase Annual Allowance and when is it triggered?

Answer 31

MPAA is £10k a year for contributions when someons starts to take flexible access drawdown from a DC pension

Question 32

Summarise what the Lifetime Allowance (LTA) was before it was abolished

Answer 32

It was the max amount of money that could be saved in to a pension without incurring a tax charge

Question 33

How much were the LTA allowances before they were abolished?

Answer 33

£1.5m in 2006 to £1,073,100 when it was abolished

Question 34

How much was the tax charge for the excess amount of the LTA?

Answer 34

25%

Question 35

What is the difference in tax treatment between if a person takes their pension as a lump sum, or as an income?

Answer 35

Income is subject to income tax and payable through PAYE Lump sum has 25% tax free, unless it has exceeded max amount which will then be subject to normal rate of tax

Question 36

When could a person receive their whole pension as a lump sum if they're in ill health?

Answer 36

When the member is under 55 and they have a life expectancy of under a year

Question 37

If a member regains their health can a scheme suspend payment of an ill health scheme pension?

Answer 37

Yes

Question 38

Give two examples of how a public sector DB scheme differs to a private sector DB scheme

Answer 38

Public sector - pensions when paid are inflation protected - better treatment to members when looking to retire early e.g ill health - Transfer club allows the pension benefits to stay the same across different public sector areas

Question 39

What 3 factors determine how much a member of a DB scheme will receive in retirement?

Answer 39

Pensionable service Pensionable salary Accrual rate

Question 40

What is the accrual rate with regards to DB pensions?

Answer 40

% or fraction that determines how much of your salary you'll earn as pension for each year of service (e.g 1/60th of yearly salary)

Question 41

What form will be filled in by member to outline where the benefits of a DB scheme will go if they were to die in service?

Answer 41

A nomination form (expression of wish form)

Question 42

If someone dies after retirement and has a DB scheme, what are the 2 usual instances that could occur?

Answer 42

1) A guarantee period could allow benefits to keep being paid (e.g 10 years) 2) Pension can continue to be paid to a spuse/ dependant - fixed amount (50%)

Question 43

What is the difference between an occupational pension scheme and a group personal pension plan?

Answer 43

Occupational scheme is set up on behalf of employees, a group personal pension is lots of individual contracts with each employee

Question 44

What is a personal pension?

Answer 44

A private pension you can set up on your own, usually for the self employed

Question 45

What is a stakeholder pension?

Answer 45

A low cost personal pension for those who want to save small amounts

Question 46

What minimum standards are stakeholder pensions subject to?

Answer 46

TThe Charges, Access & Terms standards (CAT)

Question 47

is there an income tax charge for recipients if a DC member died in service before 75?

Answer 47

No