Chapter 3 - HMRC tax regime: benefits, reliefs and overseas schemes Flashcards
Uncrystallised funds pension lump sum (UFPLS)
The member does not receive a PCLS with an UFPLS; however, typically 25% of the funds taken is paid tax-free, with the remainder taxed as the member’s pension income via PAYE
UFPLS is a trigger event for the MPAA rules.
When a member below age 75 takes an UFPLS, the gross amount is tested against their lifetime allowance under BCE 6
If the UFPLS the member wishes to receive falls within their remaining lifetime allowance, they can receive 25% of the payment tax free, but if it exceeds their remaining lifetime allowance, they cannot
Small pots payments
Small pots payments are defined as those valued at £10,000 or less
- not tested against the member’s lifetime allowance
- does not trigger the MPAA
Trivial commutation lump-sum payments
If an individual has benefits held in a defined benefit scheme and/or an ‘in payment money purchase in-house scheme pension’ and the value of their total pension benefits does not exceed the 2022/23 commutation limit of £30,000, the benefits from the defined benefit scheme and/or the ‘in payment money purchase in-house scheme’ may be paid as a cash lump sum rather than as income
- not tested against the member’s lifetime allowance, although the member must have some lifetime allowance remaining.
Serious ill-health commutation
member must have some lifetime allowance remaining
Capped drawdown
Receiving an income from a capped drawdown pension is not a trigger for the MPAA
Where an income payment under a capped drawdown fund exceeds 150% of the basis amount, the scheme automatically becomes a flexi-access drawdown fund
not been possible to set up a new capped drawdown plan since 6 April 2015
Charity lump-sum death benefits
There is also no tax charge on the charity receiving the payment, as long as it is used for charitable purposes. If the charity does not use the payment for charitable purposes the payment is taxed as an unauthorised member payment.
Primary protection
Primary protection could be used by individuals who had aggregate pension savings (including benefits in payment) of over £1.5 million as at 5 April 2006. It is no longer possible to apply for primary protection.
The maximum value that could be registered for primary protection is known as the maximum permitted pension
The first stage in the calculation is to work out a factor, known as the primary protection factor, which is effectively the percentage by which the benefits at A-Day exceeded £1.5 million (the lifetime allowance on 6 April 2006). The answer is rounded up to two
decimal places.
(Value of the individuals pension rights on 5 April 2006 - £1.5m)/£1.5m
Enhanced protection
The alternative to primary protection was enhanced protection, which was available to everyone with pre-A-Day benefits, regardless of the value of the benefits. It was appropriate for those whose benefits were below the lifetime allowance, but where there was a possibility that the lifetime allowance may be breached in the future.
if it is claimed, the individual must have stopped being an active member of all approved pension schemes no later than 5 April 2006. This means that no further benefits can be built up in a registered pension scheme after this date
Fixed protection
As the lifetime allowance reduced from 2012, it meant that there were individuals who had built up benefits at, or close to, the higher lifetime allowances. Such individuals could apply for fixed protection.
Fixed protection 2012
The lifetime allowance was reduced from £1.8 million to £1.5 million on 6 April 2012. This meant there were individuals, not registered for primary or enhanced protection, who had accrued (or who expected to accrue) pension rights in excess of £1.5 million and so were adversely affected by it. Such individuals were able to apply, by 5 April 2012, for fixed protection 2012.
- no contributions may be paid into a defined contribution scheme on or after 6 April 2012
- protection also enables them to take a tax-free PCLS of up to 25% of £1.8 million
Fixed protection 2014 protects benefits up to the greater of £1.5 million and the standard lifetime allowance on the date that benefits are crystallised.
fixed protection 2016 protects benefits, only this time up to the greater of £1.25 million and the standard lifetime allowance on the date that benefits are crystallised
Individual protection
Individual protection is another form of transitional protection for those who had pension savings valued in excess of the decreasing lifetime allowance. It was first introduced when the lifetime allowance was reduced in 2014. It gives the individual a protected lifetime allowance.
Unlike fixed protection there are no restrictions on future contributions or future benefit accrual. However, the individual may still be subject to a lifetime allowance charge on the excess over their protected lifetime allowance when benefits are ultimately crystallised
An individual with enhanced protection, fixed protection 2012 or fixed protection 2014, but not primary protection, could elect for individual protection 2014.
Where benefits were crystallised, or deemed to be crystallised, after 5 April 2006, but prior to 6 April 2014, the values at the time of the previous BCE (or deemed BCE) were adjusted by the following formula:
£1.5m / (Standard lifetime allowance at the time of the BCE or deemed CE
Pension credits
- The entitlement received by the ex-spouse is a pension credit; and
- the loss in entitlement suffered by the member of the pension scheme is a pension debit.
If an individual is subject to a pension debit after 5 April 2006, their primary protection factor has to be recalculated as at 5 April 2006. This is done by taking the value of the pension debit rights away from the original benefit value on 5 April 2006 and recalculating the primary protection factor using the lower benefit value.
If the reduced value as at 5 April 2006 is lower than £1.5m then primary protection is lost. This is the only way that an individual can lose primary protection.
Pension commencement lump sum (PCLS)
The maximum PCLS is the lower of 25% of the value of their benefits and 25% of the member’s lifetime allowance
Qualifying recognised overseas pension schemes (QROPS)
The scheme must be established in a country or territory outside the UK, which has a double taxation agreement in place with the UK.
* The scheme must be recognised for tax purposes and be regulated by the relevant authorities of the country in which it is established, or be established by certain international organisations for their employees.
* The QROPS scheme manager must confirm that any pension funds transferred from the UK which have received UK tax relief will provide retirement benefits similar to those that would have been available from a UK registered pension scheme.
If the transfer exceeds the member’s available lifetime allowance, a lifetime allowance charge at the rate of 25% will apply to the excess before the funds are transferred (the rate is at 25% and not 55% because no lump sum is physically received by the member).
Temporary non-residence
Specific rules apply to those who take benefits from a RNUKS during a period of temporary non-UK residence
Where such an individual takes benefits from a RNUKS during their period of non-residence, the pension received is only taxed in the UK upon the member’s return if the relevant withdrawals taken during that time, from both registered pension schemes and RNUKS, total more than £100,000
