Chapter 2 - HMRC Tax Regime: Contributions & Annual and Lifetime Allowances

Question 1

Individual contributions to pension- overview on tax relief, eligibility for tax relief (who and criteria (5)) and relevant UK earning (helps with above) (4)

Answer 1

Able to contribute unlimited amount to pensions but limit on amount eligible on tax relief. To be eligible for tax relief, one must be a relevant UK individual which is;

• Under the age of 75 and
• has the relevant earnings chargeable to income tax for that year or
• is resident in the UK at some point that year or
• was resident in the uk - during the five years immediately before contribution was made (subject to a max £3,600 per tax year) and - when they became a member of the pension scheme or
• They or their spouse have overseas earnings from overseas Crown employment subject to tax.

Relevant UK earnings are

• Employment income (salary, wages, bonus, overtime or commission)
• Income derived from trade, profession or vocation (sole trader or partner)
• Income arising from patent rights
• earnings from overseas crown employment subject to UK tax

Question 2

Provision of tax relief - amount eligible for tax relief, contributing for someone else who is it based on, two methods of awarding tax relief, net payment method (what is it and example of how it works using £100 contribution) & relief of making a claim method (regarding what, how reclaimed and how it works using £300 contribution)

Answer 2

The max contribution that is eligible for tax relief is the greater of £3,600 or 100% of relevant UK earnings each year. If pay more, no tax relief. If making contribution on behalf of someone else, it is based on pension holder and their earning not person contributing.

Employer sponsored occ schemes have two methods of awarding tax relief - net pay method and relief at source method.

Net pay method - contributions are taken from employee’s gross pay before income tax is deducted. How it works- if making gross contribution of £100, £100 taken directly from pay before any income tax liability is calculated therefore reducing pay by £100 saving them income tax at their marginal rate. If higher tax payer, income tax reliability reduced by 40% therefore £40 tax relief.

Relief of making a claim method- Pre 04/06, contributions made to annuity contracts were made gross and individual reclaimed tax relief via self-assessment or adjusting their tax code. How it works - higher rate tax payer contributing £300 - net contribution of £240 (300-20% tax relief) but also entitled to additional 20% - 300*20%=£60 which will be reclaimed via self-assessment or adjusting tax code. Once reclaimed, gross contribution will have cost him 240-60=180£ - £180 is 60% of £300 and therefore received 40% tax relief.

Question 3

Provision for tax relief - Relief at source method
- what is it, how it works using £100 gross contribution, how to claim for higher rate tax payers, how added for higher rate (tax bands) and what type of pension use this (2)

Answer 3

Relief at source method - contributions are paid net of basic rate tax. How it works - if making gross contribution of £100, net contribution of £80 will be taken from employees pay after tax and NICs are deducted then pension provider reclaims the £20 (basic rate) from HMRC. If higher rate tax payer, can claim further 20% via self-assessment or adjusting their tax code. Additional rate can claim further 25%. With self assessment, relief is awarded by adding the gross amount of the contribution to the employees basic rate tax band which provides additional relief by increasing the amount taxed at 20% rather than 40%.

Contributions to stakeholder and personal pensions get tax relief via this method.

Question 4

Adjusted net income - what is it, what can be used to reduce ANI, ANI calculated to determine, reclaim

Example of pension contributions used to reclaim personal allowance

• earning of £115k - work out personal allowance deduction
• how much gross pension contribution to make and what will this do in terms of PA
• What tax savings achieved (tax relief, income tax, tax bands)

Answer 4

It is total income from all sources (salary, interest, dividends) less certain deductions. One deduction that reduces an individuals adjusted net income is gross value of personally made pension contribution. Adjusted net income is calculated to determine how much personal allowance they have available or high income child benefit charge they may pay - pension contributions can be used to reclaim some or all of the personal allowance or avoid HICB.

Example of how pension contribution can be used to reclaim personal allowance;

James has earnings of £115k therefore loses £7.5k of personal allowance (lost at a rate of £1 for every £2 of ANI above £100k). If he makes gross pension contribution of £15k then his ANI is £100k which will allow him to use full personal allowance of £12.5k for 20/21.
He has therefore achieved following tax savings;
- tax relief of £3k on gross contribution of £15k
- reclaims £7.5k of PA which allows additional £7.5k of income to be paid without being taxed thereby saving £3k tax (7.5k40%)
- Basic rate tax band will be extended by £15k which means it will only be taxed at 20% rather than 40% thereby saving additional £3k (15k20%)
- total tax saving of £9k - 9k/15k= 60% tax relief on contribution.

Question 5

Adjusted net income - High income child benefit charge - example

• child benefit of £1,820 and high earner of £55k
• how does HICBC work (who applies, how charged and over what amount)
• Pension contribution to reduce ANI to £50k and savings made due to this (child benefit, tax relief and income tax & total savings and tax relief amount)

Answer 5

James & Amelia married with two children (8&6), Amelia will receive child benefit of £1,820 in this tax year. Only other source of income is James’ earnings of £55k which is also ANI figure.

HICB applies to highest income in household where earnings are over £50k and they claim child benefit. As James exceed £50k he pays charge of 50% (every £100 over £50k = 1% tax charge). Overall child benefit £910.

If James pays gross pension contribution of £5k he will reduce ANI to £50k and will therefore;

• avoid 50% tax charge on child benefit = £910 saved
• 20% tax relief on contribution = £1k tax relief
• Basic rate tax band extended by £5k meaning additional £5k taxed at 20% rather than 40% = income tax saving of £1k (£5k*20%)

Total relief and tax saving = £2,910 = 58.2% tax relief on his contribution (2,910/5k)

Question 6

Timing of tax relief - self-employed earnings - how tax paid for self-assessment (3) + amount

Example;

Tax bill previous year £14k and this year 18K - work out what tax payable when as per the above.

Answer 6

Under self assessment, tax is paid in three instalments;

• Payment on 31st Jan that tax year - 50% of previous tax years liability.
• Payment on 31st Jul that tax year - as above
• Balancing payment on 31st Jan following tax year - difference between years total tax liability and the two payments already made.

Example;

X is self employed, a higher rate tax payer and submitted her tax return for 19/20 on 10/06/20. Tax bill for previous year was £14k and total this year is £18k. Tax for 20/21 year paid like so;

• 31st Jan - first payment of £7k already paid (14k/2)
• 31st July - second payment of £7k would need to be paid
• 31st Jan 2021 - £4K due (18k-7k-7k)

Question 7

Salary vs Dividends - dividends classed as, tax relief availability and how to make significant contribution for low salary+high dividends.

Answer 7

Dividends are not classed as relevant UK earnings. If taking low salary and high dividends, it will restrict amount of tax relief available. If wanting to make a significant contribution can increase salary or make a contribution as an employer contribution.

Question 8

Salary Sacrifice - what is it, benefit, what is done with NIC savings, HMRC requirements (3) and changing or revoking agreement

Answer 8

This is when an employee agrees to reduce their salary or bonus payment and the employer pays a pension contribution on the employees behalf. Beneficial as both parties will pay reduced NICs. NIC savings can be recycled back into the pension arrangement and a larger contribution made at no extra cost to either parties.

HMRC require certain conditions to be fulfilled for a salary sacrifice arrangement;

• must be written agreement in place to reduce the salary
• agreement must be in place before salary reduced
• salary reduction cannot take employees salary below min wage.

Sal sac arrangement is irrevocable but may be possible to change terms if employees financial circumstances are altered.

Question 9

Salary Sacrifice - Advantages (6)

Answer 9

Advantages;

• if employee was already paying a pension contribution, take home pay is usually the same or can be higher.
• if sal sac is being used because of a new pension scheme, reduction in take home pay will be less than the amount of the gross pension contribution.
• NI savings made can be paid into pension arrangement.
• As salary is reduced, employees entitlement to Working Tax Credits may be increased.
• For those earning above £100k, sal sac can be used to reinstate some or all of personal allowance.
• those with earnings in excess of £50k can use sal sac to reduce earnings back to £50k to avoid High Income Child Benefit tax charge.

Question 10

Salary sacrifice - disadvantages (3 + counter for 2)

Answer 10

• Salary is reduced for all purposes which may reduce some benefits such as death in service. Notional salary may be used to ensure benefits are not reduced.
• Reduction in salary may reduce borrowing capacity for mortgage and other loans - however, changes in mortgage rules means borrowers assess affordability rather than salary multiplier therefore likely to have little impact on amount that can be borrowed.
• May cause reduction or loss of other social security benefits such as maternity.

Question 11

Recycling the PCLS - overview, HMRC will treat as… and what needs to be met (4)

Answer 11

Government see recycling of abuse of tax simplification rules due to receiving tax relief on contributions that have already been given tax relief previously. HMRC will treat PCLS as unauthorised payment when all of the following are met;

• individual receives a PCLS which, when added to any other PCLS taken into previous 12 months, exceeds £7.5k.
• PCLS means that pension contribution paid on behalf of the individual is significantly greater than it normally would be. (More than 30% of normal contributions.
• Additional contributions are made by individual or by someone else.
• Recycling was pre-planned

Question 12

Employer Contributions Provision for tax relief - employer eligibility for tax relief, must pass what trade test, when assessment may be necessary and will be accepted if…

Answer 12

Regardless of contribution amount, employer will be eligible for tax relief in full against corporation tax (if limited) or income tax (if sole trader or partnership).

Tax relief awarded if it meets the rules on allowable deductions and must pass the wholly and exclusively trade test. Decisions that they do not pass this test are rare. An assessment on whether contribution is allowable under these rules may be necessary if there’s a contribution for a controlling director or a friend or relative of said director. Will be accepted if the Renumeration package, which includes contributions, salary, bonuses, benefits of kind etc, is not excessive for the work undertaken and should be comparable with renumeration packages of other unconnected employees who are performing duties of similar value.

Question 13

Employer contributions Provision of tax relief cont… - when tax relief given and not the case when (2), will be spread if (2, think %), when they do not have to spread (2), spreading excess amount and time periods (3)

Example

• previous chargeable period £600k & this period £1.9m - work out using above
• how spread and work out total tax relief in first period

Answer 13

Tax relief usually given in same tax period as paid - not the case if loss is created or large contribution that is subject to spreading. The contribution will be spread over a number of years if;

• it exceeds 210% of contribution paid in previous chargeable period and
• amount of excess (amount paid over and above 110% of contribution paid in previous period) is £500,000 or more.

Does not have to be spread if the increased contribution is attributable to;

• the cost of living rises for pensioner members
• future service liability for new scheme entrants

Spreading excess amount time periods;

• £500k-£999k - 2 accounting periods
• £1m -£1.9m - 3 accounting periods
• £2m or more - 4 accounting periods

Example

• Previous chargeable period - £600k contributions - this period £1.9m - need to check if this exceeds 210%
• 210%*600k = £1.26m - £1.9m exceeds this therefore will need to check if spreading will apply
• £1.9m - (600k*110%) = £1.24m - sum is new contribution amount - previous contribution amount * 110%
• Spreading applies over three accounting periods - relief will be spread evenly between each accounting period (£413,333)
• For first period, relief given on 110% of previous years contributions + first of three sums = £1.073m

Question 14

Annual & Money Purchase Annual Allowance - what is annual allowance, if over annual allowance, how does tapering work and amount it starts at and MPAA introduced to…

Answer 14

Two limits on what can be contributed - the above.

Annual Allowance - max amount of benefit or total pension input that can build up from contributions during each pension input period without incurring a tax charge. If exceeded, annual allowance charge is payable at the individuals rate of income tax.

Allowance is £40k but tapered for those with an adjusted income of £240k meaning annual allowance is adjusted £1 for every £2 above the threshold.

MPAA introduced to work with AA rules to ensure that individual cannot abuse the pension flexibilities. More later in the chapter.

Question 15

Pension Input Periods (PIPs) - what is it and what is the period

Total Pension Input - what is it, calc depends on and when takes place, what DC elements are included in TPI (2) and what isn’t included in the pension input amount (2)

Answer 15

Period over which the amount of pension input is measured for annual allowance test (i.e have they exceeded or not) and runs in line with the tax year.

TPI - amount of contribution that will be tested against the annual allowance. Calculation depends on scheme they are contributing to and takes place at the end of the PIP.

DC schemes - following elements are included in the TPI;

• any relievable pension contribution paid by member or someone else (gross amount)
• any contribution paid by the employer

Not included in the pension input amount;

• contributions paid by anyone other than the employer after age 75
• investment income or returns

Question 16

Total Pension Input - Defined benefit and cash balance schemes - what is a cash balance scheme, TPI definition for these schemes, how calculated (4, think x16), deferred member input.

Example;

• Beginning of 20/21 - 15 years member, accrual rate of 1/60th and £63k
• end of 20/21 - 16 years, £66k
• Sept 19 CPI = 1.7%

Answer 16

Cash balance scheme provides mixture of DB & DC benefits as they are promised lump sum payment at certain age and remaining balance provides an income.

For DB or CB members, TPI is defined as the increase in capital value over the individuals rights over the PIP. Calculated as follows;

• value of benefits at beginning of PIP is calculated (opening pension input value) and then multiplied by 16. If lump sum included at separately after multiplying.
• total value then increased by CPI using rate of increase from September before.
• value at end of PIP is then calc’d (closing pension input value) and multiplied by 16.
• difference between two above figures is the TPI and tested against annual allowance. Death benefits are ignored.

Example;
- beginning - 15/6063k = £15,75016 = £252k1.017 = £256,284
- end - 16/6066k = £17,600*16 = £281,600
TPI = 281,600-256,284 = 25,316 therefore lower than annual allowance.

Deferred member treated as having no input

Question 17

Other exclusions from total pension input (2)

Answer 17

• Contributions and DB accrual in tax year which member dies.
• contributions and DB accrual in tax year which bens are taken early due to ill health.

Question 18

Tapering annual allowance - when tapered and how much, aimed at and how focused on them & when applies (2)

Answer 18

Individuals with adjusted income of over £240k tapered - every £2 over annual allowance reduced by £1 with £4K min.

Primarily aimed at additional rate tax payers and to ensure that this is focused on them, those with threshold income below £200k are not subject to tapering. Tapered annual allowance applies to an individual when;

• their threshold income is more than £200k and
• their adjusted income is more than £240k

Question 19

Annual allowance - Gross taxable income sources (7), threshold income calc (4 parts), adjusted income calc (3 parts)

Example
- £184k salary, £1k savings interest, £45k dividend, £15k gross personal contribution & £20k employer contribution - use this to work out threshold and adjusted income

Answer 19

When calculating threshold and adjusted income start at the persons gross taxable income from all sources which includes the following

• earnings from employment
• earnings from self-employment or partnership
• most pension income
• interest on most savings
• dividend income
• rental
• income received from trust

Once this is calc’d, then calc threshold income (only need to calc adjusted income if this exceeds £200k). Threshold income is calculated like so;
Gross taxable income - gross pension contributions (not by employer) + income given up from sal sac - taxed lump sum bens received.

Adjusted income calculated;
Gross taxable income + employers contributions less death benefits

Example;

• Gross taxable income = £230k - personal contribution of £15k = £215k + over threshold income.
• Adjusted income = £230k + £20k = £250k - annual allowance £240k = £10k/2 = allowance allowance reduced by £5k to £35k

Question 20

Carry forward of unused annual allowance - how far back and to protect against what, eligibility, member includes (4), earnings from previous years and how carry forward works (3, straightforward, think headroom) and if AA used in previous three tax years

Answer 20

It is possible to carry forward unused annual allowance from previous three tax years to protect against spikes in pension input due to a salary increase. To be able to carry forward, they must have been a member of scheme in the previous tax year. Definition of member includes active, pensioner, deferred or pension credit member.

Earnings in previous years are not taken into account, just their unused AA.

Carry forward exercise involves following;

• AA for current tax year must be used first
• must use carry forward allowance from earliest year first i.e three years ago
• allowance calc’d by deducting pension input for that year from 40k

If pension in one or more of the previous three tax years is in excess, necessary to look back further three years from that tax year to find any unused AA.

Question 21

Money Purchase Annual Allowance (MPAA) - rules designed to…, when MPAA rules triggered what happens, limit, if not accessed savings, once triggered it… (2), events that will trigger it (7), when automatically entered into MPAA rules and who can take payments without triggering (3)

Answer 21

Rules designed to work with AA rules to ensure individuals cannot abuse pension flexibilities. When MPAA rules are triggered member will have reduced AA for DC savings. MPAA currently £4K. If client has not accessed their DC savings, normal AA rules apply and don’t have to worry about MPAA. I.e only allowed to contribute £4K once starting to take own benefits.

Once triggered, it applies from following day and will continue to apply in all subsequent tax years. Events that can trigger MPAA rules are when member;

• first draws funds from flexi access drawdown fund
• takes a UFPLS
• notifies scheme admin to convert capped fund to flexi-access drawdown and then take withdrawal.
• takes more than permitted amount for capped fund.
• receives stand alone lump sum when entitled to primary protection where lump sum exceeds £375k
• payment received from flexible annuity contract.
• payment of one of they types of benefit from above from an overseas scheme has benefitted from tax relief.

Members who entered flexi-access drawdown before 04/15 automatically subject to MPAA rules. MPAA only triggered when the member takes one of the payments above, not dependant, nominee or successor.

Question 22

Money Purchase Annual Allowance - events that don’t trigger MPAA (9)

Answer 22

When the member;

• takes PCLS (only when first payment is taken from fund i.e income)
• receives trivial commutation lump sum
• receives small pots lump sum
• receives a payment from scheme pension from a DB arrangement
• received a payment from scheme pension paid directly from funds of DC where at least 11 other people are doing the same.
• receives a scheme pension secured by annuity from DC scheme of any size.
• in receipt of lifetime annuity where payments cannot go down except in prescribed circumstances.
• takes no more than permitted max amount from capped drawdown fund
• receives payment from a dependants flexi-access fund

Question 23

MPAA in practice

MPAA trig + input < £4K - total AA, carry forward (2)

> £4K - subject to (2) and when, what is alternative annual allowance, tapering min and AAA amount, carry forward (2) and what is pension savings tested against.

What happens when exceeded MPAA and default and alternative chargeable amount (how calc’d and if negative) - work out DC £7k + DB £25k nothing else (page 25)

Answer 23

MPAA triggered and pension input is equal to or less than £4K

• members total annual allowance for tax year is max £40k (different for tapered, cannot go lower than £10k) (DB contributions 36k)
• possible to carry forward AA but only for DB pension input
• any unused MPAA cannot be carried forward.

MPAA triggered and input is greater than £4K

• Subject to alternative annual allowance as well as MPAA once member has flexibility access their pension savings and input can only be used for DB or cash balance scheme.
• AA for DB scheme is £36k (alternative allowance and tapering may change this) If tapering causes AA to be min of £4K then AAA £0.
• possible to carry forward unused AA to increase AAA
• cannot carry forward to increase MPAA
• pension savings tested against MPAA are not tested against AAA.

If exceeding MPAA, tax charge applicable. Calculated as the higher of the default chargeable amount and the alternative chargeable amount. If negative answer, figure set to £0.

• Default - total pension input for DB & DC scheme - (AA for tax year + any carry forward allowance)
• Alternative - input into DB - (AAA+carry forward) + (input into DC - MPAA available)

Question 24

MPAA rules are triggered part way through PIP - when are contribtions subject to MPAA, pension input tested against AAA when?, cash balance scheme apportionment

Page 27 if need an example

Answer 24

Contributions made to DC scheme after date of trigger event are subject to MPAA not before. Where DC input amount after trigger event exceeds MPAA, balance of pension input tested against AAA.

Cash balance schemes pension input is apportioned on a time apportionment basis (i.e. if trigger event occurred on day 265of the PIP, pension input amount that is tested against MPAA is 100 iMessage the pension input amount)

Question 25

MPAA - Flexible drawdown pre 04/15 - entitled to, converted and consequence of conversion

Carry forward & MPAA - unused MPAA, funds tested against and how this affects carry forward amount

Answer 25

Entitled to no AA after entering flexible drawdown (both DB & DC). Flexible drawdown converted to flexi-access meaning they regained AA but were immediately subject to MPAA.

Cannot carry forward unused MPAA. If funds tested against MPAA they are not tested against AAA meaning even if exceeding MPAA but not exceeding AAA, they will have carry forward amount for AA next tax year.

Question 26

AA & MPAA charge in practice - what is it, how can it be paid (2) and what is one of these known as, to allow the latter what conditions must be satisfied (2), how is reduction paid & charge rate (2)

Answer 26

AA charge is tax charge usually paid via self-assessment but can elect scheme admin to pay on their behalf (known as scheme pays). Must satisfy some conditions to allow this;

• AA charge exceeds £2k (may vary depending on scheme)
• total amount of pension savings in scheme for that tax year has exceeded AA.

If paid by the scheme, reduction is made to pension benefits which depends on the type of scheme;

• DC - members fund is reduced by amount of AA charge.
• DB - adjustment is to benefits that member has accrued and need to demonstrate to HMRC that the adjustment is just and reasonable.

AA charge is payable to individual’s marginal income tax rate. Dividends taxed at 32.5%.

Question 27

Lifetime Allowance - limits what, how is it set, allowance for this tax year and what is it and LTA for previous tax year up to 06/07

Answer 27

It limits the amount of savings that can be built up in a tax-advantaged environment. Has been indexed to increased annually in line with increases in CPI - lifetime allowance for 20/21 is £1,073,100.

Lifetime allowance is the aggregated limit that applies to all pension savings which includes pre A-day

06/07 - £1.5m
07/08 - £1.6m
08/09 - £1.65m
09/10 - £1.75m
10-12 - £1.8m
12-14 - £1.5m
14-16 - £1.25m
16-18 - £1m
18/19 - £1.03m
19/20 - £1.055m

Question 28

Benefit crystallisation events - what is it, what and when it must be tested against, if bens fall within LTA, if breached subject to what, how charge is worked out (5) and how PCLS should be calculated

Answer 28

When pension benefits come into payment, they must be tested against the members lifetime allowance - known as a benefit crystallisation event. Must be tested against LTA at 75 even if benefits may not have been taken yet (known as unused funds) as BCE has taken place. Way benefits are valued depends which BCE is triggered.

If benefits taken fall within LTA then no tax liability. If LTA breached, subject to tax charge (LTA charge) and charge depends on benefits taken as lump sum or as income.

• if any excess taken as pension income, LTA charge of 25% before fund is used to provide income.Then income is subject to normal income tax.
• if any excess taken as lump sum, LTA charge of 55% taken before lump sum paid.
• If charge arises through transfer to overseas scheme, 25% charge.
• Under BCE’s that take place at 75, LTA charge of 25%.
• If decide to designate balance to flexi-access drawdown, LTA charge of 75%

Ensure that PCLS is calculated on how much lifetime allowance remains regardless of how much previously taken (25% if LTA)

Question 29

Valuation of benefit crystallisation events - benefit valuation (depends on and how valued,9)

Answer 29

Way in which benefits are valued depends on which BCE is triggered;

BCE 1 Drawdown Pension = market value of fund

BCE 2 Scheme Pension - scheme pension x 20

BCE 3 Increase to SP in payment - add increase*20

BCE 4 Purchasing lifetime annuity - market of fund used to purchase annuity

BCE 5 DB test at 75 - reaching 75 without using all or part of entitlement to scheme pension or lump sum = scheme pension*20 + lump sum amount

BCE 6 Relevant lump sum - becoming entitled to lump sum = amount of the lump sum

BCE 7 Relevant lump sum death bens = amount of lump sum death benefit

BCE 8 Transfers overseas = amount of transfer value

BCE 9 Prescribed event = amount prescribed in regulations

Question 30

Using the factors: Bens started on or after A-Day - what necessary to do, LTA variation (in relation to BCE calcs), example using £48k and SP.

Pre a-day - valuation factor used, how applied to annuity, HMRC justification, how applied to drawdown and why increased to 150%

Answer 30

Where benefits start on or after a day, necessary to calculate percentage of LTA that was utilised in previous BCE. % must be expressed to two decimals places and rounded down. LTA varies from year to year and % used up previously is subject to relevant year.

E.g. Scheme pension of £48k in 07/08 then draws income in 20/21 trig BCE.
SP= 20*48k = 960k. LTA 07/08 = 1.6m. LTA used in 07/08 = 960k/1.26m = 60%. 40% left of current LTA.

25:1 valuation factor is used for pre A-day income benefits. For lifetime annuity or scheme pension this factor is applied to the yearly income amount. Higher factors justified by HMRC as no account is taken of any PCLS drawn before A-Day and assumed that cash is normally taken up to max.

For drawdown pensions, max permitted income is 150% of basis amount. Done so that someone who crystallised bens post 04/15 didn’t have their drawdown assesssed as a larger % of LTA

Question 31

Valuation of pre 04/15 drawdown pension when post 04/15 BCE occurs (what situation & how calc’d) - capped + flexi access (3) and when does valuation of benefits take place and what does it establish

Answer 31

Capped Drawdown - 25*80% of max annual amount that can be paid as max income at date of BCE.

Flexi-access (prev flexible where changed from capped pre 03/14)- 25*max annual amount payable as capped drawdown at point they changed to flexible.

Flexi-access (as above post 03/14) - 25*80% MAA if contract was capped pension at date of BCE

Flexi-access (capped drawdown converted post 04/15) - 25*80% of max amount of capped that could have been paid at point pension became flexi-access.

Valuation of benefits that started before A-day only takes place on the first BCE that happens after A-Day which establishes % of LTA already used. Then used for future BCEs.

Question 32

Higher lifetime allowance - entitled if (8)

Answer 32

Entitled to higher LTA if;

• not UK residents
• transferred benefits into recognised oversea pension scheme
• have entitlement to benefits arising from pension credit after sharing order following divorce.
• if they have the above, that was acquired post 04/06 and from a pension that was in payment to member already.
• have benefits in a pre a-day scheme and have registered for primary protection.
• registered for fixed protection 2012 due to reduction of LTA from £1.8m to £1.5m in 04/12
• registered for fixed protection 2014 or individual protection 2014 due to LTA reduction from £1.5m to £1.25m 04/14.
• registered for fixed or individual protection 2016 due to reduction of LTA from £1.25m to £1m 04/16.

Question 33

Pension credits on divorce - pre 04/06 - when is pension credit deemed to occur and known as, how is enhancement of LTA calc’d and descriptions of these two things.

Example - work out enhancement if pension credit = £150k after RPI increase and LTA for 06/07

Answer 33

Pre 04/06 - pension credit is deemed to occur on the effective date of the pension sharing order (transfer day). Enhancement of LTA allowance calc’d by IAPC/SLA.

IAPC is amount of pension credit awarded increased by % increase in RPI from month in which rights were acquired to 04/06.

SLA is standard lifetime allowance for 06/07 tax year - £1.5m

Question 34

Pension credit - post 04/06 and pension in payment - why enhanced, what enhancement known as, when not entitled, provisioned for, how enhancement worked out, if PCF generated before 04/12 (2)

Answer 34

LTA enhanced to reflect due to members pension being in payment and already being assessed for LTA at that time. LTA enhancement factor is called pension credit factor. No entitlement to enhancement if pension credit rights acquired post 04/06 and pension is not in payment yet.

Provision for enhanced rights are to ensure pension credit rights are not tested again for lifetime allowance purposes.

PCF is measured on basis of actual value of PC rights derived from pension in payment - enhancement = pension credit rights/lifetime allowance at the time ex-spouse acquired those rights.

If PCF generated before 04/12, different rules apply when applying LTA for future BCE;

• uplift is provided by applying the factor to the figure of £1.8m (if more than LTA)
• uplift then added to LTA at date BCE = individuals LTA