Chapter 2 Pension HMRC Rules

Question 1

What does the LTA increase by?

Answer 1

CPI but rounded to 2 decimal places

Question 2

Benefit Crystallisation events happens when you?

Answer 2

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).

Question 3

In which circumstances does the 20:1 factor for scheme pension BCE possibly need to increase?

Answer 3

When the Pension Increases are the greater of 5% or RPI

Question 4

20:1 Factor is based on what?

Answer 4

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.

Question 5

What is PIE in terms of pensions

Answer 5

Pension Increase Exchange - giving up future increases in scheme pension for an increased starting scheme pension that remains level ongoing.

Question 6

The Pensions Act 2014 introduced a new form of beneficiary called a nominee, who can that be?

Answer 6

Anyone the members decides to nominate to receive benefits upon death.

Question 7

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?

Answer 7

Date when scheme administrators first know of the death. Or, could have reasonably known if later.

Question 8

Relevant Lumps sums are?

Answer 8

PCLS, UFPLS, Serious Ill health lump sum and LTA Excess lump sum

Question 9

On death of a member, who pays the LTA charge?

Answer 9

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.

Question 10

Other than death, who pays the LTA Charge on a BCE?

Answer 10

Both scheme administrator and member joint liable. Normally scheme administrator pays death benefits less tax charge owed to HMRC.

Question 11

LTA used after 2006 should be expressed as what?

Answer 11

A percentage, to two decimal places, NOT ROUNDED. I.e 66.6666% should be 66.66 % (not 66.67%)

Question 12

Pre ADay benefits that have been crystallised are given a factor of what for annuities?

Answer 12

25:1 therefore £10,000 income = £250k

Question 13

Pre A Day benefits are calculated and added as if an existing fund today. How?

Answer 13

Factor of 25:1, take total and add to the other funds about to be crystallised.

Question 14

Higher LTA applies if?

Answer 14

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

Question 15

Pension Credit and LTA before divorce, whats the formula?

Answer 15

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

Question 16

Post 2006 pension in Payment on divorce. The factor is know as the Pension Credit Factor. When does it apply

Answer 16

Only when the pension came into payment for the member and tested against the LTA. Not if the payment is not yet in payment.

Question 17

You establish the factor by taking the Pension Credit amount and / by LTA. When is this used?

Answer 17

Applied at any future BCE but before 2012, as different rules apply.

Question 18

Pension credit factor before 2012, how is this calculated?

Answer 18

Current LTA + (1.8m x Pension credit factor, say 0.34) = new LTA
example 1,000,000 + 1.8 x. 34 = 1,612,000

Question 19

Normal Pension age is 55, but what two scenarios allow earlier access to pension benefits?

Answer 19

Ill health grounds; or

pre A Day 2006 entitlement to take benefits before 55.

Question 20

Ill health defined by HMRC

Answer 20

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.

Question 21

What is Trivial Commutation?

Answer 21

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

Question 22

Small Pots exemption, what is this?

Answer 22

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

Question 23

Transitional protection is?

Answer 23

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.

Question 24

PCLS is usually the lower of?

Answer 24

25% of the benefits coming into payment; or

25% of the remaining lifetime allowance (LTA)

Question 25

Can PCLS be higher or lower than 25%?

Answer 25

Yes, lower via occupational schemes pre 2006.

Higher via other scheme and can be protected for future BCE.

Question 26

What is the process for TFC post 75?

Answer 26

Possible where there is suffcient LTA remaining (tested at 75) and unused pension funds available.

Question 27

Name some facts about small pots exemptions

Answer 27

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.

Question 28

Explain Trivial Commutation Lump Sum

Answer 28

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.

Question 29

Serious Ill health Commutation Key points?

Answer 29

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

Question 30

Scheme pension does not normally trigger the MPPA but when it does, why?

Answer 30

Because the is fewer than 11 employees and or dependants receiving a scheme pension.

Question 31

Scheme pension commencement triggers a BCE and therefore a test against what?

Answer 31

LTA
BCE2 is for scheme pension,
BCE6 in regard to any PCLS and
BCE5 if no benefits taken but reach 75.

Question 32

Lifetime or flexible annuity is tested against what?

Answer 32

LTA

Question 33

What can a Flexible Annuity trigger and why?

Answer 33

MPPA because the income can rise and fall below limits set in pre 6 April 2015 rules

Question 34

Annuity purchased from drawdown funds will not be tested against the LTA, why?

Answer 34

because its already been tested. However, if the value has increased since the original BCE, the excess is tested against the LTA.

Question 35

Annuity held at age 75 with no changes, will not be what?

Answer 35

Tested against the LTA because previously tested.

Question 36

Capped drawdown is available to who?

Answer 36

Those who has designated funds to Capped pre 6 April 2015

Question 37

Capped facts?

Answer 37

150% of GAD limit set by Govt Actuary Dept, based on prevailing long term gilt yield and members age in complete years

Question 38

Flexi Access

Answer 38

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

Question 39

Moving from Capped to Flexi, when is the MPPA triggered

Answer 39

Only when the income is drawn from Flexi access.

Question 40

Where an income payment under capped exceeds 150% of base income what happens?

Answer 40

MPPA is auto triggered

Question 41

Can capped be convert to flex then back to capped?

Answer 41

No once converted it cannot go back to capped.

Question 42

Staying within the capped income limits will mean what?

Answer 42

MPPA is not triggered therefore full AA available.

Question 43

One off larger income payments under Flexi Access of UFPLS can be taxed on what basis?

Answer 43

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%

Question 44

HMRC definition of dependant for death benefits is?

Answer 44

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

Question 45

HMRC definition of Nominee for death benefits is?

Answer 45

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

Question 46

HMRC definition of successor for death benefits is?

Answer 46

When a dependent from a previous inherited pension dies and passes down to their dependants or relatives and known as a Successors Pension

Question 47

What is the pension Credit Factor for?

Answer 47

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.

Question 48

How does the pension credit factor change when the award is made aftrer 2006 and before 2012?

Answer 48

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

Question 49

When is the LTA still used after age 75?

Answer 49

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.