Chapter 3 - HMRC Tax Regime: Benefits, Reliefs & Overseas Schemes

Question 1

Early payment of benefits on ill-health grounds - what scenario can they be taken (2), options available (6, think pensions), when can lump sum be paid and where from (2) and lifetime allowance usage

Answer 1

Benefits can be taken earlier than 55 on grounds on ill-health where (HMRC rules, scheme may be stricter);

• scheme admin receives medical evidence that member is and continues to be medically incapable of carrying out occupation due to injury, sickness, disease or disability.
• as a result of ill-health member has ceased that occupation.

Options available are - scheme pension, lifetime annuity, drawdown, trivial commutation lump-sum payment, small pots payments or UFPLS.

Payment of benefit as a lump sum can only be done if serious ill-health (life expectancy of less than a year). Lump sum can only be paid from uncrystallised funds or out of unused funds from 75.

If a trivial commutation lump sum payment or small pots payment is made, not tested against their lifetime allowance. All other cases (lifetime annuity etc) are.

Question 2

Footballers and pension - what can they do and availability now, still entitled?, LTA reduction % and how much. Can explain the calc once you know the example answer.

Example - calculate LTA & possible charge - 35 years old and pension valued at £750k

What protection in place and allows them to take bens if (3), LTA any reduction + why? What can they use sum to purchase (3)

Answer 2

Prior to 04/06 some occupations had normal retirement age below 50 e.g footballers - no longer available but those who were a member of scheme pre 04/06 and entitled these benefits (early retaking) can take a pension before min pension age. Benefits tested against a reduced LTA which is 2.5% for every complete year benefits are taken before 50. Post 04/06 have normal retirement age of 55.

14 years between date of crystallisation and 55 so LTA reduced by 2.5%14=35%. LTA available = 107310065% = £697,515. Excess= 750k-697,515= £52,485. If taken as income tax charge of 25% or as lump sum tax charge of 55% on excess.

Transitional protection in place for deferred or current members of occupational pension scheme for those entitled to take bens from age 50 and can do so if;

• rules of the scheme allow it
• was in scheme rules before 12/03
• benefits are taken in full.

LTA not reduced in this scenario as rule to take bens in full means that phased retirement would cause right to earlier pension to be lost. Can use sum to purchase annuity, use drawdown or take UFPLS.

Question 3

Lump sums - PCLS - TFC available when taking bens from where (3), what conditions need to be met to be considered PCLS (5) and max allowable PCLS (2)

Answer 3

Tax free lump sum that may be available when they start to take their bens for a scheme pension, lifetime annuity and drawdown pension. 5 conditions it needs to meet to be considered PCLS;

• Lump sum entitlement must be connected to arising entitlement to relevant pension under the same registered pension scheme (one of three above)
• Must not have used up all LTA at the time of payment.
• Lump sum must be paid within six months before and ending twelve moths after member becomes entitled to relevant pension.
• Must be paid when they reach min pension age (or ill health or protected pension age)
• The lump sum is not an excluded lump sum (bridging pension not set up with purpose of increasing members PCLS).

Max allowable PCLS is normally lower of;

• 25% of capital value of the benefits coming into payment
• 25% of the available portion of the members remaining LTA.

Question 4

PCLS continued - 25%>, 75 and LTA

Answer 4

Some occupational DB schemes entitled to less than 25% whilst others could accrue more than 25%.

If under the age of 75, scheme admin needs to check that member has sufficient LTA to cover the payment - if not, no longer a PCLS and now a LTA excess lump sum and charged 55%.

Members uncrystallised benefits tested against LTA on 75th birthday and can still take PCLS but only if some LTA remaining.n

Question 5

UFPLS - overview and how taxed, tested against what and if exceeds they can (3, pre 75), post 75 and LTA relationship + how taxed

Example

1. Pre 75 - £300k sum + 25% of LTA left - page 3/8 - work out tax charges
2. Post 75 - £250k + 22% LTA -

Answer 5

Possible to access some or all of funds of uncrystallised DC scheme without designating funds into drawdown. 25% tax free with rest being taxed as income e.g. if taking 30k, 25% of this is tax free and rest is taxed as income (after personal allowance).

Gross amount of UFPLS tested against LTA (BCE6). If exceeds LTA then they can; for under 75

• reduce amount taken so that it is within allowance
• take sum intended and face 55% tax charge
• take sum up to LTA available and designate rest into flexi-access plan therefore only incurring 25% excess charge.

Someone over age of 75 and wants to take UFPLS must have some LTA remaining and if they do not payment is not considered UFPLS and taxed as income via PAYE (tax free amount =25% of remaining LTA).

If lump sum they wish to receive falls within LTA can receive 25% tax free otherwise tax free amount restricted to 25% LTA remaining.

E.g. 107310022%= 236,082. Wants to take 250k therefore tax free is restricted to 25% of LTA remaining - 236,08225%=59,020.50. Remaining is taxed as pension income.

Question 6

Small pots payments - definition, LTA & MPAA (think previous chapter 2), tax treatment (2)

Answer 6

Defined as those valued at £10k or less. They are;
- not tested against LTA and does not trigger MPAA.

If small pots payment is in respect of crystallised benefits, tax treatment is;

• 25% payment received is tax free
• 75% taxed as pension income via PAYE (marginal rate)

Question 7

Trivial Commutation Lump Sum - can receive this from (2), what is the latter of these two, cannot exceed what amount and if doesn’t can be paid as what, LTA, tax treatment (2) and tax treatment if scheme pension

Answer 7

Can receive TCLS from DB scheme and in payment money purchase in house scheme. Latter is a scheme pension payable by scheme administrator whereby DC member has become entitled to.

If benefits held in the above and does not exceed £30k then they can be paid as a cash lump sum rather than as income. Is not tested against LTA (not BCE) but must have some remaining.

If the benefits of DB scheme have not been crystallised, tax treatment is;

• 25% of payment is tax free
• 75% taxed as income at marginal rate

If TCLS being made in respect of scheme pension (from either of two schemes), the entire payment is taxed at marginal rate.

Question 8

Pension Income - how schemes pay income (2)

Secured Pension - how is income secured (2)

SP - when can DC offer SP, what can DB offer, how taxed, when is MPAA trig (think prev chapter) and BCE trigs.

Lifetime annuity - how purchased and taxed, BCE trigs and LTA test

Answer 8

Most schemes pay income in two different ways via;
- secured pension or drawdown pension.

Secured pension - income is secured through scheme pension or purchasing an annuity.

Scheme pension - DC scheme can only offer SP if they have already offered lifetime annuity whereas DB scheme can only offer SP. Taxed at marginal rate. MPAA is only triggered if buying an SP if paid directly from DC arrangement where fewer than 11 members are doing the same.

BCE 2 triggered if receiving SP before 75 (BCE 6 if any PCLS) and BCE5 vice versa.

Lifetime annuity - purchased via DC fund and taxed at marginal rate as income. Triggered under BCE4 (6 for any PCLS). If funds used to purchase come from crystallised funds held in drawdown or unused funds then not tested against LTA.

Question 9

Drawdown Pension - two types;

Capped - how to convert into flexi-access (2)

FAD - when MPAA trig’d, how may payments increase tax (3)

Answer 9

Any income taxed at marginal rate.

Capped - as it is does not trigger MPAA rules can still fulfil full AA. They can convert this into flexi-access by either;

• informing scheme admin
• taking income in excess of 150% of the basis amount that applies to the scheme year in question. Auto becomes FAD if this happens and MPAA rules applied immediately in this case.

FAD - MPAA only triggered once crystallised benefits are taken. Taxed at marginal rate and must be aware that payments may cause increase in tax payments, for example by;

• reducing amount of savings that benefitted from 0% savings income starting rate.
• pushing income into higher rate tax band which also reduced personal savings allowance to £500 or additional rate tax band
• pushing income above £50k therefore paying HICB charge or reducing PA

Question 10

How PAYE operates for flexible payments - how are they taxed, 1/12 and regular payments

Answer 10

• if not previously issued tax code notice applicable to payments made from the scheme, providers must tax the taxable portion of any flexible payment on a one month basis. PA and tax rate band all 1/12 of usual fig.
• if payments regular/semi then HMRC will issue scheme with tax notice code and over payments can be adjusted quickly by scheme adjusting tax deducted from future payments.

Question 11

Tax treatment of death benefits - scheme rules and dependant, who can receive death benefits from what scheme (dependant & successor/nom), two year window (what is it and when does it start)

Answer 11

Important to check scheme rules with regards to dependant as it may be narrower than HMRC definition. Format in which death bens can be received is determined if dependant or nominee or successor.

Dependant - SP, lifetime annuity, FAD & lump sum
Nominee & Successor - Lifetime annuity, FAD & lump sum

Two year window - timeframe in which death benefits must be designated to income producing contract or paid as lump sum death benefit. Starts when notified of death or date that admin should have been expected to know of death (basically if not told in good time).

Question 12

Tax treatment of lump sum death benefits - LSDB paid from uncrystallised or unused funds.
- why uncrystallised changes to unused, who paid to a restrictions,

Tax position… - if death occurs before 75 and within two year window (2), if outside two year window (2) and if over 75 - examples page 3/18

Answer 12

Changes from uncrystallised to unused as they have been tested against LTA due to being age 75.

When member dies, fund that remains can be paid as lump sum to beneficiary and no restriction who this is. Tax position is as follows;
Death occurs before 75;
If designated to provide lump sum within two year window.
- Payment subject to LTA check
- if within LTA, paid free of tax but if over suffers 55% charge.
If outside two year window
- when made to beneficiary, payment is taxable as recipients pension income via PAYE. If to trustee or personal rep then subject to 45% charge
- No test against LTA

If over 75

• when made to beneficiary, payment is taxable as recipients pension income via PAYE. If to trustee or personal rep then subject to 45% charge.
• no test against LTA

Question 13

Tax treatment of death benefits - DB lump sum death benefit

Tax treatment - before 75 (3) and post 75 (2)

Answer 13

Payable when DB member dies. Tax treatment as follows;

Death before 75

• not subject to tax as long as in two year window
• payment tested against LTA and any excess is charged at 55%
• if outside window and made to beneficiary, payment is taxable as recipients pension income via PAYE. If to trustee or personal rep then subject to 45% charge

Death post 75

• when made to beneficiary, payment is taxable as recipients pension income via PAYE. If to trustee or personal rep then subject to 45% charge
• not tested against LTA

Question 14

Tax treatment of death benefits - Annuity protection LSDB and pension protection LSDB - protected capital lump sum (what does it do, from DC and DB known as), max LSDB equal to (2), tax treatment (pre 75 (4) and post (3)

Answer 14

If member dies after securing benefits via a scheme pension or lifetime annuity, usually LSDB is included if scheme has a protected capital lump sum;

• if scheme pension from DB scheme known as pension protection LSDB
• if scheme pension or lifetime annuity from DC known as annuity protection LSDB.

Under annuity protection, max LSDB is equal to amount crystallised to provide income which;

• for DC, amount of fund used to purchase annuity
• for SP, 20xinitial pension - value of gross payments up to date of death.

Same as pension protection but no crystallisation so crystal amount calc’d as 20xinitial pension.

No restriction to who LS can be paid to and tax treatments as follows;
Death before 75
- not subject to tax
- no test against LTA due to being previously paid from crystallised funds
Post 75
- when made to beneficiary, payment is taxable as recipients pension income via PAYE. If to trustee or personal rep then subject to 45% charge.
- no test against LTA due to being previously paid from crystallised funds
- take away any unused funds from protection amount

Question 15

LSDB paid from drawdown pension - how can it be paid on death and restrictions and tax treatment post (3) and pre 75 (2)

Answer 15

On death of member, drawdown pension can be paid as a lump sum and no restrictions on who it can be paid out to. Tax treatment

Capped & FAD pre 75

• not subject to tax as long as paid in two year window
• if outside window and made to beneficiary, payment is taxable as recipients pension income via PAYE. If to trustee or personal rep then subject to 45% charge
• no test against LTA as lump sum paid from previously crystallised funds.

Capped & FAD post 75

• taxable and made to beneficiary, payment is taxable as recipients pension income via PAYE. If to trustee or personal rep then subject to 45% charge
• no test against LTA as lump sum is paid from previously crystallised funds.

Question 16

Trivial Commutation LSDB - max payment and two occasions when this is paid, if over max how taxed and how taxed.

Charity LSDB - tax treatment

Answer 16

Two occasions where this may be paid and max of £30k can be paid;

• survivor commutes a survivor’s lifetime annuity or SP
• member dies within guaranteed period of lifetime annuity or SP and recipient wishes to commute the remaining payments.

If over £30k it will be taxed as unauthorised member payment.

In all cases, lump sum payment is taxed at recipients marginal rate via PAYE.

Charity LSDB can be paid tax free if member has no surviving dependants

Question 17

Death bens in form on continuing income - Guarantees - restrictions and tax treatment;
SP guarantee (2)
Lifetime Annuity guarantee pre 75 death (2) and post 75 (2)

What is a dependants SP

Answer 17

Guarantees - no restrictions on who can receive payment under this. Tax treatment;
Scheme Pension guarantee
- Income taxed as recipients pension income via PAYE (marginal rate.
- No test against LTA

Lifetime annuity guarantee and pre 75

• Income free of tax
• No test against LTA

Lifetime annuity guarantee post 75

• Income taxed at marginal rate
• No test against LTA

Dependants SP - SP set up so that on death, income passes to dependant and taxed at marginal rate.

Question 18

DB in form of income - Survivors Annuity - tax treatment (pre & post 75), Depend, nom or success how they can purchase annuity

Answer 18

Tax treatment;
Pre 75
- any income received is free of tax, no test against LTA
Post 75
- taxed at marginal rate and not tested against LTA

Dependant, nominee or successor can use funds to purchase an annuity (D,N or S);
D or N - purchase will arise following death of member so can be made from either uncrystallised/unused funds or undrawn funds.
S - purchase arises through death of one of the above so can only be made from undrawn funds (funds held in drawdown contract). Same as survivors annuity in terms of tax treatment.

Question 19

DBs paid in form of income - Dependants capped drawdown - dependant dies successor must… and tax treatment (2)

D, N or S FAD - what is it useful for and why and tax treatment (2)

BCE 5C occurs where (3) and if triggered (think previous chapter)

Answer 19

If dependant in capped drawdown and dies, successor must allocate funds into FAD. Dependants capped drawdown tax treatment;

• None tested against LTA
• Pre 75 no income tax and post 75 at marginal rate.

D, N or S FAD - Useful generational wealth planning tool as no limit to number of times can be passed following death of previous holder. Tax treatment;

• None tested against LTA
• Pre 75 no income tax and post 75 marginal rate tax

BCE 5C only occurs where;

• member is aged 75 at time of death
• member has uncrystallised pension benefits
• benefits are designated into depend or noms FAD fund within two year window.
• if trig and over LTA then subject to excess tax charge.

Question 20

Transitional Reliefs - LTA definition, why transitional rules intro’d and how applied for, circumstances for transition protection (2), registering and two forms of protection.

Answer 20

LTA is aggregate limit that applies to all pension savings. Some individuals will have accrued pension provision prior to a-day that was above or near the LTA. Therefore transitional rules were introduced so they could apply to HMRC to protect a benefit entitlement under the previous rules. They could choose transitional protection of pre a-day rights in two circumstances;

• wanted to protect rights because above or close to LTA
• divorced and wanted to protect benefits from a pension credit in respect of sharing order issued pre a day.

Cannot register for transitional protection for a-day right. The two forms are known as primary protection and enhanced protection.

Question 21

Primary Protection - can be used by who, if taken all bens, protected fund based on?, how scheme valued (3), how bens already in payment valued and why and occ scheme value within what and max value of primary protection known as?

Answer 21

Primary protection could be used by individuals who had aggregate pension savings of over £1.5m at 04/06. If individual had taken all of their pension benefits prior to 04/06 then protection not required, however, if they hadn’t, protected fund is based on benefits that were not in payment plus any benefits already in payment. The way in which they are valued depends on the scheme involved;

• DC scheme where bens are not being drawn = value of fund
• CB schemes as above = calculated in line with rules of scheme
• DB as above = valued using factor of x20

Any benefits already in payment on 04/06 are valued using factor of 25 to reflect that PCLS would have likely been taken at outset.

If bens being valued are from occ scheme, total value must be within pre a-day limits. Max value that could be registered for primary protection is known as maximum permitted pension.

Question 22

Primary Protection cont… - how individual rights are protected (i.e. what does PP do), Primary Protection Factor formula, LTA reductions and PPF relationship (think formula), why was underpinned allowance intro, main advantage of PP, when bens taken PPF applied to greater of what.

Example - work out personal lifetime allowance - Bens of £2.1m pre a day

Answer 22

Under PP, individuals rights protected by giving individual a higher LTA in order to reflect that the value of benefits exceeded £1.5m at A-Day.

First stage of calc is to work out primary protection factor which is % by which benefits at a-day exceeded £1.5m. Formula = (value of individuals pension rights on a day - £1.5m)/1.5m

Pre 04/12 PPF was applied using LTA at time of crystallising benefits and then added to LTA. Reductions in LTA mean that PPF would be applied to a lower value meaning level of protection would reduce. To maintain value, benefits taken post 11/12 onwards applied to fig of £1.8m - underpinned allowance.

Main advantage of PP is that contributions to pension or accrual can continued to be made after a-day.

When bens are taken or post 75 uncrystallised, PPF applied to greater of £1.8m or LTA in force at the time. If bens are less than LTA at the time, no charge but charge if exceeded.

E.g. Bens of £2.1m at a-day and applied for PP.
(2.1m-1.5m)/1.5m = 0.40/40%. If then drawing bens in 20/21, PPF applied to underpinned LTA of £1.8m. Therefore personal lifetime allowance of 1.8m+(1.8m*40%) = 2.52m

Question 23

Primary Protection cont (2)… - bens taken at different times are what, BCE uprated formula, LTA reduction & TFC disadvantage

Answer 23

When bens taken at different times they are tested against personal LTA each time. Amount used in previous BCE must be uprated = value of bens at previous BCE *(1.5m/standard LTA at time of BCE).

LTA reduction could have an impact on those with primary protection who do not have a protected TFC. If have PP and TFC less than 375k on a-day, was still able to take 25% of standard LTA in force at time of BCE. For BCE’s in 20/21 and without protected TFC could be disadvantaged as SLTA now is less than LTA in place 06/07. Can still take TFC of up to 25% of £1.5m

Question 24

Enhanced Protection - available to who, appropriate in what scenario, if claimed and benefits built up, type of scheme (2) and LTA charge

Answer 24

Available to everyone pre a day benefits. Appropriate for those with benefits below LTA but possibility that LTA could be breached in future.

If enhanced protection claimed, must have stopped being an active member of their pension schemes pre a-day. This means no further benefits can be built up in registered pension scheme after this date and if they are then enhanced protection is lost.

Impact depends on type of scheme;
DC - no payments can be made (bar payments for death in service)
DB - Limited further payments as long as doesn’t exceed certain limit.

Under enhanced protection, not subject to LTA charge when bens are taken even if value of bens exceeds LTA at that time.

Question 25

Fixed Protection 2012 - LTA reduced to, when they to apply by, if already registered for other protection, protected value and if exceed, TFC amount, rules that apply (4) and FP14/16 (values and apply)

Answer 25

LTA was reduced from £1.8m to £1.5m in 04/12 and individuals had until 05/04/12 to apply for fixed protection 12. If registered for primary or enhanced could not apply for fixed.

Under FP12, bens are protected up to value of £1.8m and if exceeded subject to LTA charge. Can also take TFC of 25% of £1.8m.

Rules that apply are;

• no contributions can be made into DC scheme post a day.
• DB accrual most stop by 04/12 but FP not lost if accrual no more than the relevant % in a tax year (either annual rate specific in scheme rules or % CPI in Sep last year).
• contributions used to fund existing cover do not invalidate FP12
• no new pension scheme can be started after 04/12 other than to accept transfer of existing pension rights.

Fixed protection 2014 as above but £1.5m is protected and apply in 04/14
Fixed Protection 2016 as above but greater or £1.25m or LTA at the time is protected and apply by 04/16

Question 26

Individual Protection 2014 - LTA drop from, aimed at who (2), what does it do, restrictions, LTA charge and applying. Rules that apply (3), four amounts aggregated for value of pension savings, when valuing must take into account (2), post a-day but pre 04/14 LTA value

Answer 26

Introduced when LTA dropped from £1.5m to £1.25m. Aimed at individuals who didn’t have PP and had savings over 1.5m on 04/14. It gives an individual a protected LTA equal to value of their benefits subject to max of £1.5m. No restrictions on future contributions or accrual. May be subject to LTA charge on excess and had to apply by 04/17.

Rules apply;

• individual with any protection bar primary could apply for this
• any existing enhanced or fixed protection takes precedence
• max PCLS is 25% of members protected LTA.

Four possible amounts that need to be aggregated when working out value of persons pension savings;
A- pre a-day pensions in payment
B - Pension and PCLS into payment after a-day
C - Uncrystallised benefits at 04/14
D - Uncrystallised savings for relieved members of non-uk pension schemes.

When valuing, following points must be taken into account

• for uncrystallised benefits in DB scheme, no early retirement factors were applied to the accrued pension.
• only pension bens valued for IP14 purposes and not LSDB.

Where bens crystallised post a-day but pre 04/14, values at time of previous BCE were adjusted by = 1.5m/SLTA at time of BCE.

Question 27

Individual Protection 2016 - max value protected, how to register and deadline

Fixed & Individual Protection 2016 - bens over what can do what, why is it good and means individual will have LTA of (2)

Answer 27

Like IP14 but max £1.25m. Register online and no deadline but possible that schemes will no longer hold records necessary for application therefore unable to apply.

Anyone with bens over £1m can elect both fixed and individual 2016 as if contribute more, fixed lost but individual remains in place. Means that individual with both will have LTA;

• £1.25m if no contributions or accrual after 04/16 or
• protected LTA if contributions or accrual happen.

Question 28

Pension Credits - what is pension credit and pension debit, if have PP subject to what and what recalc’d, formula for this, when is PP lost, impact what and depends on how received (3, think transfer)

Example £2.4m, PPF 60% and debit of £600k

Answer 28

• Entitlement received by ex-spouse is pension credit
• loss suffered by member is known as pension debit

Individual with primary protection that gets divorced may be subject to pension debit and PPF must be recalc’d. Done by = original benefit value on a-day minus value of pension debit. Then recalc PPF using lower figure.

Example - £2.4m + PPF 60%. Pension debit of £600k.
2.4m-600k = 1.8m. (1.8m-1.5m)/1.5m*100% = 20% and when bens taken in future they are tested against new allowance.

If bens reduced below £1.5, PP is lost.

Pension credit may also impact enhanced protection for recipient (ex-spouse) and depends on how pension is received;

• is pension credit transferred to new arrangement, enhanced protection is lost due to setting up new arrangement.
• if transferred into existing DC scheme, not lost
• if transferred into existing DB or CB then may be lost at later stage due to benefit accrual.

Question 29

PCLS & Primary Protection -
PCLS greater than £375k
- Pre 04/12 PCLS index in with (2), TFC indexed in line with what and avoids what, Protected TFC formula

PCLS less than £375k - subject to what rules

Why could they be disadvantaged and PCLS can be greeater of (3) post 14/15

Answer 29

If PP and PCLS greater than £375k on a-day, starting point for calc of protected PCLS is monetary amount of PCLS on a-day. Pre 04/12 indexed in line with increases in SLTA between a-day and date bens were taken.

So not disadvantaged by reductions in LTA, their protected TFC is indexed in line with increases in LTA using underpinned LTA of 1.8m. Formula = PCLS*underpinned allowance/a-day LTA.

If have protected PCLS less than £375k subject to normal rules meaning PCLS entitlement is lower of;
- 25% of value of bens or 25% of LTA

However due to LTA being reduced, could be disadv due to LTA previously being higher, therefore, for crystallisations since 14/15, max PCLS is greater of;

• 25% SLTA in the tax year the PCLS is taken
• £375k
• still subject to 25% of value of bens if this is lower

Question 30

PCLS & Enhanced Protection - PCLS greater than £375k rules (2), TFC and reductions in LTA, less than 375k (3)

Answer 30

Enhanced protection + pre-a day PCLS greater than £375k then rules;

• individuals entitlement to PCLS is protected as % of ben value at a-day
• when bens taken, individual entitled to same percentage of bens value as it was at a-day. This % could be less than 25% and still exceed 375k but still needs to be protected because it exceeds LTA of £1.5m.

Any protected TFC has not been affected by reductions in LTA since 04/12 due to being percentage of value of benefits.

Protected PCLS of less than £375k subject to same rules as primary protection;

• 25% of SLTA in year which PCLS taken
• £375k
• limited to 25% of bens if lower than the above

Question 31

Tax treatment of pension fund investments - taxation (3), exemption and tax charge imposed when

Answer 31

Taxation as follows;

• no liability to income tax for income derived from investments or deposits
• no CGT arises on gains and no allowance for losses
• trading income is taxable

One exemption is to the above is taxable property.

Tax charge also imposed when fund investment provides a benefit for that member i.e. if asset owned by the fund is used free of charge.

Question 32

Unauthorised payments - authorised member payments include (3), authorised employer payments include (4), unauthorised payments subject to and levied at, payment made when alive or dead

Answer 32

Authorised member payments are any member payment detailed in HMRC regulations such as;

• pension or lump sum payment at retirement/death benefits
• recognised transfers
• administration payments

Authorised employer payments are any employer payments detailed in HMRC regs such as;

• authorised surplus payments
• compensation payments
• authorised employer loans
• scheme admin payments

Unauthorised payments are subject to charges which are designed to prevent abuse of tax privileges. It’s an income tax charge levied at 40%. If payment made when alive then member liable for charge and if dead, recipient is liable. Also applied to prohibited assets (property).

Question 33

Unauthorised Payments Surcharge - when applies and known as what, in respect of who, how is threshold reached for member and employer, levied at how much and payable on top of what, payable how (member payment (2) and employer payment)

Answer 33

This applies when value of all unauthorised payments in a year exceed or equal the surcharge threshold which are known as surchargeable unauthorised payments. Can be in respect of member or employer.

Threshold is reached if unauthorised payments exceed 25% of value of member pension rights under the scheme (member) or 25% of value of pension schemes assets (employer).

Surchage is an additional tax charge of 15% which is payable on top of the unauthorised payment charge. Payable as follows;
Surchargeable unauthorised member payment
- member who made the payment if made when alive
- recipient if payment made after death of member.

Surchargeable unauthorised employer payment
- payable by employer

Question 34

Scheme Sanction Charge - what is it, tax charge, if recipient pays reduced by (2)

De-registration charge - what is it, how levied

Answer 34

Scheme sanction charge - scheme admin that makes at least one chargeable payment in any one year is subject to this. 40% of chargeable amount. However when recipient pays charge, tax is reduced by lower of;

• amount of unauthorised payment charge that has been paid
• 25% of the scheme chargeable payments that are tax paid.

De-registration charge - if HMRC withdraws registration this is due. Scheme admin liable and taxed at rate of 40% of total value of funds held by the scheme before registration is withdrawn.

Question 35

Qualifying recognised overseas pension schemes (QROPS) - two categories, conditions to be QROPS (7), transfer charge applies for what and when and doesn’t apply for what

Answer 35

Schemes set up outside UK fall into two categories - QROPS & RNUKS.

Certain conditions must be satisfied to be a QROPS which include;

• established outside UK and double taxation agreement.
• recognised for tax purposes and regulated by relevant authorities in that country.
• Must confirm that overseas funds will receive similar bens to UK ones.
• scheme manager must notify HMRC that scheme meets prescribed conditions.
• transfer is an authorised payment but is a BCE
• Member needs to meet eligibility criteria set by QROPS.
• must provide info on when member flexi accesses their benefits.

An overseas transfer charge of 25% may apply to transfers from UK scheme to a QROPS or Q to Q transfer. Applies to request post 03/17 but may not apply when Q and individual are resident in same country.