Chapter 3 - HMRC Tax Regime: Benefits, reliefs and overseas schemes

Question 1

Normal Pension Age

Answer 1

• Currently 55
• Expected to increase in line with State pension age, so that it will always be 10 years earlier
• Prior to April 2010, it was 50

Question 2

Ill Health

Answer 2

• HMRC state benefits can be taken earlier if scheme administrator is provided with medical evidence that the member is medically incapable of continuing their current occupation and has stopped that occupation

Question 3

Serious Ill Health

Answer 3

• If one’s life expectancy is under 12 months, benefits may be paid out of uncrystallised/unused funds as a “serious ill-health lump sum”

Question 4

Protected Retirement Ages

Answer 4

• Some occupations were permitted to retire earlier than the normal retirement age prior to A-Day
• This age remains protected, but their LTA is reduced by 2.5% for every complete year they retire before the normal pension age of 55

Question 5

Types of member benefits (Lump Sum Benefits)

Answer 5

• PCLS
• UFPLS
• Small pots payments
• Trivial commutation lump sum payments
• Serious ill-health commutation

Question 6

Types of member benefits (Income Benefits)

Answer 6

• Secured pension
• Scheme pension
• Lifetime annuity
• Drawdown pension
• Capped drawdown
• Flexi - Access drawdown

Question 7

Pension Commencement Lump Sum

Answer 7

• Tax Free
• Lump sum must meet 5 conditions to qualify as PCLS
• Entitlement to lump sum must relate to entitlement to a relevant pension under same UK registered pension scheme
• Member must have some lifetime allowance left
• Must be paid 6 months prior/12 months after entitlement to relevant pension arises
• Must be paid on or after normal pension age
• Must not be an excluded lump sum
• Maximum PCLS usually lower of 25% value of benefits and 25% of remaining LTA
• Scheme Rules may mean payment is less
• If had £375,000 plus at A-Day can protect:
• Primary Protection - protect amount in £s of PCLS at A-Day, this is then increased in line with LTA (using underpinned £1.8m)
• Enhanced Protection - protect % of benefit value at A-Day, unaffected by changes to LTA
• Scheme specific protection - if scheme allowed for a greater lump sum than 25% at A-Day, scheme could record PCLS, but protection lost if transferred out.

Question 8

Uncrystallised Funds Pension Lump Sum

Answer 8

• UFPLS are payable from money purchase arrangements and allow the member to take funds from their pension pot as a single lump sum or a series of lump sums
• Taking UFPLS triggers MPAA
• Can be taken after 75, but only from unused funds
• No PCLS is available, but 25% of UFPLS usually paid tax-free, remainder taxed as pension income under PAYE

Question 9

Small Pots Payments

Answer 9

• Where fund valued at £10,000 or less
• When taken, it is not tested against LTA and does not trigger MPAA
• Can be taken over 55

Uncrystallised: 25% tax free, 75% taxed as pension income via PAYE

Crystallised: 100% pension income via PAYE

Question 10

Trivial Commutation Lump Sum

Answer 10

• DB scheme or MP ‘in-house’ scheme in payment only
• Total value of all member’s benefts must be under £30,000
• Not tested against LTA, but must have some LTA left
• Taxed as per small pots payments above

Question 11

Serious ill-health commutation

Answer 11

• Life expectancy under 12 months, benefits may be paid out of uncrystallised/unused funds as a serious ill health lump sum
• If under 75, must have some LTA left, no limit on amount paid out
• Payment tax-free up to LTA
• excess - 55% charge
• If over 75, must have had some LTA left at 75
• whole sum taxed as pension income via PAYE

Question 12

Scheme Pension

Answer 12

• If in MP scheme, must be offered lifetime annuity first
• DB scheme can only offer scheme pension
• Taxed as pension income via PAYE
• Does not usually trigger MPAA
• If paid prior to age 75, BCE 2 and BCE 6 (if PCLS also paid) test against LTA
• If reach 75 and in DB scheme but not yet in receipt of scheme pension or PCLS, then BCE 5 triggered and test against LTA occurs

Question 13

Lifetime Annuity

Answer 13

• Purchased with funds from MP Scheme
• Taxed as pension income via PAYE
• If annuity is classed as a flexible annuity, MPAA will be triggered
• If annuity bought with uncrystallised funds prior to age 75, BCE 4 (annuity) and BCE 6 (PCLS) test against LTA
• No test of 75+ or if funds used from previously crystallised funds

Question 14

Capped Drawdown

Answer 14

• Only for this who had designated funds into CD prior to 6/4/2015.
• Does not trigger MPAA, unless take income in excess of 150% of basis amount (in which case contract will also convert to FAD effective from the day before the 150% is exceeded so no unauthorised payment tax charge)
• Can also convert to FAD on request, MPAA will only trigger once income taken from FAD

Question 15

Flexible Access Drawdown

Answer 15

• MPAA only triggered once income taken from FAD

- If previously in Flexible Drawdown, then already subject to MPAA

Question 16

Who can receive Death Benefits?

Answer 16

• Dependent - widow, widower, surviving civil partner, child under 23 (dependency due to mental or physical capability), anyone financially dependant or interdependent with the member due to physical or mental capability
• Nominee - someone other than a dependant who the member wishes to receive death benefits
• Successor - person nominated by a deceased’s member’s dependant or nominee to receive benefits on their own subsequent death

Question 17

Primary Protection

Answer 17

• Available to individuals with total pension rights both crystallised (pre 2006) and uncrystallised (post 2006) valued at more than £1.5m at 5/4/2006 and had applied for PP before 6/4/2009.

Question 18

Primary Protection Lifetime Allowance Enhancement Factor

Answer 18

• The PP Lifetime allowance enhancement factor is calculated as:

(A-Day Fund Value - £1.5m)/£1.5m

Question 19

Primary Protection - Impact of Changes to Lifetime Allowance

Answer 19

• For BCE’s from 2011/12 onwards, the PP factor is applied to £1.8m (the SLA in 2011/12). This is the ‘underpinned lifetime allowance’ and protects a member’s primary protected benefits that would otherwise be cut because of the reductions in the standard lifetime allowance from 6/4/2012

Question 20

Primary Protection - Benefits taken at different times

Answer 20

• Each time a BCE takes place, it needs to be re-tested against the individual’s personal LTA each time using this formula:

Value of Previous BCE x (£1.5m/Standard lifetime allowance at time of previous BCE)

Question 21

Primary Protection - Pension Credits arising from pension sharing

Answer 21

• If someone has PP and their pension benefits are subject to a pension debit, their lifetime allowance enhancement factor has to be recalculated as if it was back at 5/4/06. This is done by deducting the pension debit from the pension value on 5/4/06 and recalculating the PP factor using the lower factor

Question 22

PCLS with primary protection

Answer 22

• If an individual’s total tax free lump sum rights at 5/4/06 were valued at more than £375,000, these rights must have been registered when applying for PP to secure protected tax-free cash entitlement.

Question 23

Enhanced Protection

Answer 23

• There will be NO liability to any lifetime allowance charges if enhanced protection is retained and although there is no limit on the fund size, there are restrictions on the amount of tax free lump sum that can be paid.
• EP was an alternative to PP at A Day. It could be claimed by those whose benefits were under the LTA at A-Day, but who felt the limit might be breached at a future date. Once claimed, the member could make no further pension input. If they did, EP would be lost

Question 24

Enhanced Protection - Pension credits arising from pension sharing

Answer 24

• Where an individual receives a pension credit as a result of a pension sharing order they could lose their EP as a result, if the pension credit is paid into a new arrangement

Question 25

PCLS and Enhanced Protection

Answer 25

• If the member’s PCLS rights at A Day was greater than £375,000, then these rights must also have been registered with HMRC when applying for the EP.

Question 26

Fixed Protection 2012

Answer 26

• Protected LTA of £1.8m
• Available before 6/4/2012
• Must not have personal or employer contributions

Question 27

Fixed Protection 2014

Answer 27

• Protected LTA of £1.5m
• Available before 6/4/2014
• Must not have personal, employer contributions or FP12

Question 28

Fixed Protection 2016

Answer 28

• Protected LTA of £1.25m
• No Deadline
• Must not have personal, employer contributions or FP12

Question 29

Individual Protection 2014

Answer 29

• This gave an entitlement to a personal LTA of £1.25m-£1.5m
• IP14 is not lost if further contributions are made or if benefit accrual occurs under DB scheme membership
• It was possible to register for IP14 until 5/4/2017 with the criteria that the member must have had total pension benefits valued at more than £1.25m on 5/4/2014, and not have registered primary protection in place.

Question 30

Individual Protection 2016

Answer 30

• Total pension benefits must be valued at more than £1m on 5/4/2016 and not have previously registered PP or IP14. It gives an entitlement to a personal LTA of somewhere between £1m and £1.25m
• IP16 can be taken out alongside any of the fixed protections or enhanced protections and they will take precedence over IP16
• AS the values at 5/4/16 are required, it was not possible to apply for IP16 in advance, but the system was open for online applications effective from 6/4/2016, with no deadline

Question 31

Unauthorised Payments Charge

Answer 31

• The unauthorised payments charge is 40% on the unauthorised payment. Where the unauthorised payment is made to or for a member, it’s the member who’s responsible for paying the tax charge, even if they didn’t receive the payment.
• In an occupational pension scheme, where the payment or benefit is made on behalf of the employer, its the employer who’s subject to the tax charge

Question 32

Unauthorised Payments Tax Surcharge

Answer 32

• It is applied when unauthorised payments of 25% of the value of the member’s pension rights (for a member) or scheme assets (for the employer) or more are made in any year
• The rate of an unauthorised payments surcharge is 15%

Question 33

Sheme Sanction Charge

Answer 33

• The making of an unauthorised payment will also lead to a separate charge to income tax on the sceheme administrator called the scheme sanction charge, unless the payment falls within narrowly defined exemptions
• The amount of the scheme snaction charge in any tax year is 40% of the total scheme chargeable payments made by the scheme in that tax year (that is the same figure used when assessing what unauthorised member payments have been made).
• How ever, the 40% charge could be reduced by 25% of the scheme chargeable payment, if the unauthorised payments charge has been paid, and thus reduces the scheme sanction charge to 15%.

Question 34

QROPS

Answer 34

• Scheme must be in an overseas country with double taxation agreement with UK
• Scheme must be recognised and regulated in home country, or be run by certain international organisations for their workers
• Manager must confirm funds transferred from UK which have received tax relieved contributions will provide benefits similar to those of UK registered pension scheme
• Manager must advise HMRC that scheme meets their conditions, if HMRC agrees, it will allocate a QROPS reference number
• Manager must confirm to HMRC that it meets conditions every 5 years
• Transfer to a QROPS is a recognised transfer
• Member will have to meet QROPS eligibility criteria
• QROPS/member must advise HMRC if benefits are flexibly access

Question 35

Transfer to QROPS

Answer 35

• BCE 8
• If exceeds LTA, the charge is 25%
• QROPS must advise HMRC when fund starts to pay benefits/is transferred back out
• Overseas transfer charge of 25% (applies to residual fund after any LTA charge) for UK to QROPS or QROPS to QROPS transfer unless QROPS is:
• Resident in same country as member or EU/EEA
• an OPS and member is an employee/employer under scheme
• an overseas public service scheme and member is employed by an employer in the scheme
• a pension scheme of an international organisation that employs the member
• Scheme Administrator and member jointly and severally responsible for charge
• Can be applied for up to 5 tax years after transfer
• Refund can also be given in those 5 years if circumstances change and someone would be exempt from the charge.

Question 36

QROPS Member Payment Charge

Answer 36

• Payable where QROPS makes payment from former UK funds that would not have been authorised in the UK
• Subject to unauthorised payments tax charge (40%) and surcharge (15%)
• Member pays
• Scheme may lose QROPS status