Chapter 2 Pension HMRC Rules Flashcards
What does the LTA increase by?
CPI but rounded to 2 decimal places
Benefit Crystallisation events happens when you?
Take a lifetime annuity, an annuity purchase from money in a money purchase fund.
Enter drawdown, paid directly from a money purchase fund.
Scheme pension; paid directly from a registered pension scheme
Uncrystallised Pension Fund Lump Sum, paid directly from a money purchase fund and before being designated to drawdown.
Age 75 even if benefits not being taken at the time and post 75 referred to as Unused Funds (Crystallised).
In which circumstances does the 20:1 factor for scheme pension BCE possibly need to increase?
When the Pension Increases are the greater of 5% or RPI
20:1 Factor is based on what?
20 x scheme pension regardless of age or sex but can be greater if the pension increases are greater than 5% or RPI - HMRC agrees and sets the rate.
What is PIE in terms of pensions
Pension Increase Exchange - giving up future increases in scheme pension for an increased starting scheme pension that remains level ongoing.
The Pensions Act 2014 introduced a new form of beneficiary called a nominee, who can that be?
Anyone the members decides to nominate to receive benefits upon death.
Two year Window (death) is the timeframe which death benefits need to be designated or paid out as a lump sum. But when does the clock start ticking?
Date when scheme administrators first know of the death. Or, could have reasonably known if later.
Relevant Lumps sums are?
PCLS, UFPLS, Serious Ill health lump sum and LTA Excess lump sum
On death of a member, who pays the LTA charge?
Scheme administrator pays the death benefits in full and the personal representatives must ascertain if a LTA charge is likely and arrange payment to and notify HMRC.
Other than death, who pays the LTA Charge on a BCE?
Both scheme administrator and member joint liable. Normally scheme administrator pays death benefits less tax charge owed to HMRC.
LTA used after 2006 should be expressed as what?
A percentage, to two decimal places, NOT ROUNDED. I.e 66.6666% should be 66.66 % (not 66.67%)
Pre ADay benefits that have been crystallised are given a factor of what for annuities?
25:1 therefore £10,000 income = £250k
Pre A Day benefits are calculated and added as if an existing fund today. How?
Factor of 25:1, take total and add to the other funds about to be crystallised.
Higher LTA applies if?
They are not UK Resident
Transferred from QROPS
Entitlement to Pension Credit in the form of pension sharing prior to 2006
Divorce post 2006 but was in payment before 2006
Pre A Day benefit and registered for Enhanced or Primary protection
Fixed protection 2012 LTA drop from 1.8m to 1.5m
Fixed or individual 2014 LTA drop from 1.5 to 1.25
Fixed or individual protection 2016 drop from 1.25m to 1m
Pension Credit and LTA before divorce, whats the formula?
Increased awarded Pension Credit / Standard LTA (at that date) = new % LTA to be added to current LTA
You are given an enhancement to the LTA
Post 2006 pension in Payment on divorce. The factor is know as the Pension Credit Factor. When does it apply
Only when the pension came into payment for the member and tested against the LTA. Not if the payment is not yet in payment.
You establish the factor by taking the Pension Credit amount and / by LTA. When is this used?
Applied at any future BCE but before 2012, as different rules apply.
Pension credit factor before 2012, how is this calculated?
Current LTA + (1.8m x Pension credit factor, say 0.34) = new LTA
example 1,000,000 + 1.8 x. 34 = 1,612,000
Normal Pension age is 55, but what two scenarios allow earlier access to pension benefits?
Ill health grounds; or
pre A Day 2006 entitlement to take benefits before 55.
Ill health defined by HMRC
Receive evidence from a recognised medical practitioner that member is unable or capable or carrying on current employment due to sickness, illness, injury or disease and disability.
Employers can go further and say must not be able to conduct any other employment or work.
What is Trivial Commutation?
Over 55 and take your entire pension pot as a cash (must be under £30k total in all pensions) lump sum. 25% tax free, the remaining amount is subject to tax and added the rest of your income. No LTA
Small Pots exemption, what is this?
Pensions under £10k can be taken as cash, up to 3 times, not affecting any other pension benefits.
For employer schemes, this is unlimited but only if the employer allows it. No LTA
Transitional protection is?
Occupational pension schemes, retirement age of 50.
Must have been in schem rules before 10 Dec 2003
All benefits are taken in full via:
Scheme pension
Annuity purchase
UFPLS
Drawdown
Not phased as this would lose the age 50 retirement aged. Because not taking all the benefits at once.
PCLS is usually the lower of?
25% of the benefits coming into payment; or
25% of the remaining lifetime allowance (LTA)
Can PCLS be higher or lower than 25%?
Yes, lower via occupational schemes pre 2006.
Higher via other scheme and can be protected for future BCE.
What is the process for TFC post 75?
Possible where there is suffcient LTA remaining (tested at 75) and unused pension funds available.
Name some facts about small pots exemptions
3 money purchase pensions max under £10k each unlimited for Unconnected occupational pensions but still £10k over age 55 Not tested against LTA Not counted as a BCE 25% is paid tax free if uncrystallised Full 100% taxed if any has already been crystallised.
Explain Trivial Commutation Lump Sum
Rules apply from April 2015
Under £30k
Defined Benefit
All pensions under and less than £30k
Nominate commutation, 12 months to complete it
must leave and not further accrual under the DB scheme
If not started the commutation in 3 months, can move it.
25% tax free
75% treated as members pension income and taxed under PAYE
If converting scheme pension to triviality the entire sum (under £30k) all taxed at marginal rate.
Serious Ill health Commutation Key points?
Under 75, paid as tax free lump sum up to the LTA
Under 75 but over LTA, excess taxed at 55%
Over 75, taxed as PAYE
Scheme pension does not normally trigger the MPPA but when it does, why?
Because the is fewer than 11 employees and or dependants receiving a scheme pension.
Scheme pension commencement triggers a BCE and therefore a test against what?
LTA
BCE2 is for scheme pension,
BCE6 in regard to any PCLS and
BCE5 if no benefits taken but reach 75.
Lifetime or flexible annuity is tested against what?
LTA
What can a Flexible Annuity trigger and why?
MPPA because the income can rise and fall below limits set in pre 6 April 2015 rules
Annuity purchased from drawdown funds will not be tested against the LTA, why?
because its already been tested. However, if the value has increased since the original BCE, the excess is tested against the LTA.
Annuity held at age 75 with no changes, will not be what?
Tested against the LTA because previously tested.
Capped drawdown is available to who?
Those who has designated funds to Capped pre 6 April 2015
Capped facts?
150% of GAD limit set by Govt Actuary Dept, based on prevailing long term gilt yield and members age in complete years
Flexi Access
Anyone designating funds to drawdown post 6 April 2015 goes to Flex Access.
No limit on withdrawal
Any member or dependant who nominated flexible drawdown prior to 6 April 2015 will auto go to flexi
Moving from Capped to Flexi, when is the MPPA triggered
Only when the income is drawn from Flexi access.
Where an income payment under capped exceeds 150% of base income what happens?
MPPA is auto triggered
Can capped be convert to flex then back to capped?
No once converted it cannot go back to capped.
Staying within the capped income limits will mean what?
MPPA is not triggered therefore full AA available.
One off larger income payments under Flexi Access of UFPLS can be taxed on what basis?
Month 1 basis so the maximum personal allowance that can be used against that payment is 1/12th therefore can lead to too much tax being paid. This is where no income was taken and no tax code previously issued.
If income is ongoing the tax office will normally issue a tax code and sort out any over payment of tax quite quickly.
For single payments and no further income required, you need to call the tax office for a reclaim.
Lump sum is applied in the form of 1/12th PA
1/12th at 20%
1/12th 40%
remainder at 45%
HMRC definition of dependant for death benefits is?
Members widow(er) at the time of death or
A child under 23,
A child who is dependent due to mental or physical impairment deemed by scheme administrator
A Person not married or not in a civil partnerhip but who in the opinion of the Scheme Admin was
Financially dependent on the member
in a mutual financial relationship with member
reliant on the member due to physical or mental impaitment
HMRC definition of Nominee for death benefits is?
Individual other than a dependant nominated by the member, can be individual or charity, if none, the scheme Admin can make a noimination on members behalf
HMRC definition of successor for death benefits is?
When a dependent from a previous inherited pension dies and passes down to their dependants or relatives and known as a Successors Pension
What is the pension Credit Factor for?
When pension credit is awarded pre 2006. Awarded credit divided by LTA = the credit factor. Ie 150,000/1,055,000=14.21% or a factor of 0.14
Factor is then applied at any future BCE.
For when someone is divorced and receives part of ex spouse pension. That came into payment before or after 2006 when the award is made.
How does the pension credit factor change when the award is made aftrer 2006 and before 2012?
Establish the factor at the date awarded given.
IAPC/LTA in that year=Pension credit factor.
At future BCE we use £1.8m for the factor.
Therefore Current LTA+(£1.8mx0.14)=New LTA
When is the LTA still used after age 75?
Only tested again when the client wants to take PCLS from Unused funds (remaining PCLS and LTA still available. However, as no LTA charges apply the client can take a larger lump sum in excess of the allowable LTA for PCLS, subject to income tax at the clients marginal rate.
