Chapter 3 - Retirement Planning (Part 1)

Question 1

What is the annual ISA limit?

Answer 1

£20,000 (including the £4,000 LISA limit)

Question 2

What is the annual LISA limit and how much does the government add as a bonus?

Answer 2

£4,000

Governement bonus = 25%

Question 3

What age group can contribute to a LISA?

Answer 3

18-40

Contributions can be made up to 50 years old

Question 4

When can funds in a LISA be accessed and what is the tax penalty for accessing early?

Answer 4

The accumulated fund can only be used to buy a first home, and/or for use as pension income from the age of 60.

If cash or assets are withdrawn before then, there is usually a 25% charge, unless the individual is terminally ill.

Question 5

What is the current State Pension Age (SPA) and what will it increase to in the future?

Answer 5

• Currently, the SPA is 66 for both men and women, having previously been 65. Prior to this, women had a lower age of 60.
• By 2028, the SPA for both men and women will be 67;
• By 2039 it will be 68.

Question 6

How many qualifying years of NICs are required to receive the Basic State Pension and how much is it per week?

Answer 6

• 30 Years
• £156.20 per week

Question 7

What is the Triple Lock?

Answer 7

The guaranteed amount state pensions increase per year set out in legislation and is the highest of the following:

• Earnings – the average percentage growth.
• Prices – the percentage growth in prices measured by the consumer price index (CPI).
• 2.5%.

Question 8

How many qualifying years of NICs are required to receive the New State Pension and how much is it per week?

Answer 8

• To qualify for any amount of new state pension, individuals will need ten qualifying years on their NI record.
• To receive the full state pension, they will need 35 qualifying years.
• In 2022–23, the pension is £203.85 per week.

Question 9

What is included in the calculation of the benefits of a DB Pension?

Answer 9

• member’s years of service in the pension scheme
• member’s pensionable salary, and
• scheme’s accrual rate.

Question 10

What is commutation (of a pension)?

Answer 10

Giving up some of the annual pension income in exchange for a lump sum.

Question 11

Who owns the assets of a DB Pension Scheme?

Answer 11

The Trustees

Question 12

What are the statutory requirements of DB Pension Schemes?

Answer 12

• To increase premiums by a statutory amount
• To increase benefits paid by a statutory amound

Question 13

What are the main advantages and disadvantagers of DB schemes?

Answer 13

Advantages

• Members can calculate what they will receive in retirement
• Helps retention of staff for an employer, particularly as schemes become rare
• Member benefits from statutory revaluing to keep pace with inflation
• Members do not have any of the investment risk

Disadvantages

• The pension scheme and the employer carry all the investment risk
• The scheme must appoint trustees, actuaries and auditors and formalise a costing structure
• The scheme must contribute to the compensation schemes, adding to costs
• If the employer goes bust, the scheme may enter the Pension Protection Fund and the promised pension might be reduced

Question 14

What are the main advantages and disadvantagers of DC schemes?

Answer 14

Advantages

• Employer knows exactly where their commitment ends
• Good fund performance could lead to higher benefits
• Helps retention of staff for an employer
• Lower running costs for an employer
• Access to pension following pension freedoms at age 55

Disadvantages

• Members carry all the risks
• Poor fund performance could lead to lower benefits
• Unknown benefits making it hard to plan ahead
• Individuals could run out of money if they access pension flexibly

Question 15

What are the tax concessions of a registered pension scheme?

Answer 15

• tax relief on contributions
• tax-free growth and income in the fund
• tax-free PCLS.

Question 16

What is the maximum gross annual contribution to a pension scheme that can receive tax relief?

Answer 16

£3,600 (under 75 - over 75 receive no tax relief)

Question 17

To reveive tax relief on pension contributions, a person must fulfill which criteria?

Answer 17

• have relevant UK earnings, chargeable to income tax for that tax year
• be resident in the UK at some time during the tax year, or
• have been resident in the UK at some time during the last five tax years and have been a UK resident when they joined the pension scheme, or
• have for that tax year earnings from overseas Crown employment subject to UK tax, or
• be the spouse or civil partner of that individual with earnings from overseas Crown employment that is subject to UK tax.

Question 18

What is the tax treatment of employer pension contributions and how much can be paid?

Answer 18

• Contributions for an employee made by their employer are unlimited,
• Paid gross and can be offset as a business expense for corporation tax purposes.

Question 19

What are the two methods of tax relief for pensions contrubutions?

Answer 19

• The ‘Relief at source’ method. This means that contributions are paid after deducting basic rate tax. This basic rate of tax is then claimed from HMRC by the scheme administrator and added to the pension fund.
• The net pay method is where an individual’s gross pay is reduced by the pension contribution before income tax is deducted.

Question 20

What method of tax relief for contributions is used for DB and DC schemes?

Answer 20

• Contributions to DB pension schemes receive tax relief via net pay.
• DC pension schemes can choose, either the relief at source or the net pay method for receiving tax relief.

Question 21

What is the annual allowance for pension contributions and what is the tax implications for contributions exceeding this allowance?

Answer 21

• The annual allowance for the tax year 2023–24 is £60,000.
• If the annual allowance has been exceeded, then the individual will be liable for an annual allowance charge at their marginal rate of income tax.

Question 22

What is the tapered annual allowance?

Answer 22

• Individuals with adjusted income in any given tax year greater than £260,000 have their annual allowance restricted for that particular tax year, providing that their threshold income (broadly adjusted income less pension contributions/accruals from all sources) exceeds £200,000.
• For every £2 of adjusted income above £260,000 (including benefits in kind), the annual allowance will be reduced by £1 until the annual allowance is reduced to £10,000. This is known as ‘tapered annual allowance’.
• The maximum reduction to the annual allowance will be £50,000, so anyone with adjusted income in excess of £360,000 will have an annual allowance of £10,000.

Question 23

How much tapered annual allowance can be carried forward?

Answer 23

Any annual allowance that they have not used in the previous three tax years to the current tax year if they have sufficient UK taxable earnings in the current year to claim tax relief

Question 24

How much is the Money Purchase Annual Allowance (MPAA) & what circumstances trigger it?

Answer 24

£60,000

• taking withdrawals from a flexi-access drawdown (FAD) fund (Funds that are designated to allow FAD do not trigger the MPAA – only withdrawals trigger the MPAA)
• taking an uncrystallised funds pension lump sum (UFPLS)
• converting a capped drawdown plan to a FAD plan, and
• accessing a flexible annuity.

Question 25

What happens whan MPAA rules are triggered?

Answer 25

Limiting future contributions that can be made to money purchase pension plans to £10,000.

Question 26

What is the Lifetime Allowance and what are the implications of exceeding it?

Answer 26

• During the 2022–23 tax year, the LTA was £1,073,100.
• Where benefits exceeded this, a tax charge would be applied to the excess when crystallised. This was 55% where taken as a lump sum, or 25% where taken as taxable income, for example through a flexi-access drawdown plan.

Question 27

What are the 4 BCEs with regard to pensions?

Answer 27

• BCE 1 – when funds are designated to provide a drawdown pension.
• BCE 2 – when a member becomes entitled to a scheme pension (from a DB or DC scheme).
• BCE 3 – when a scheme pension is increased beyond an allowable amount.
• BCE 4 – when a member becomes entitled to a lifetime annuity under a money purchase arrangement.

Question 28

What are the 5 BCEs with regard to Unused funds at age 75 or on earlier death?

Answer 28

• BCE 5 – when a member reaches age 75 under a DB arrangement without having drawn all or part of their entitlement to a scheme pension and/or lump sum.
• BCE5A – when a member reaches age 75 with a drawdown pension fund.
• BCE 5B – when a member reaches age 75 with unused money purchase funds.
• BCE 5C – when a member dies before their 75th birthday, and any uncrystallised funds are designated to provide dependants’ or nominees’ FAD pension within two years of death.
• BCE 5D – When a member dies before their 75th birthday, and any uncrystallised funds are designated to provide dependants or nominees with an annuity within two years of death.

Question 29

What are the 2 BCEs with regard to lump sums?

Answer 29

• BCE 6 – when a member becomes entitled to a relevant lump sum.
• BCE7 – when a relevant lump sum death benefit is paid on the death of a member.

Question 30

What is Primary Protection (of LTA) and how is it calculated?

Answer 30

• This was available if someone had pension rights valued at over £1.5 million on 5 April 2006; £1.5 million was the LTA in 2006–07
• this was worked out by applying an additional factor to the current standard LTA at the time that the benefits are actually taken. The factor is called the primary protection factor and is calculated as follows:

(Total value of benefits at 5 April 2006 – £1.5m) / £1.5m (the result is rounded down to two decimal places)

Question 31

What is enhanced protection and what are the rules?

Answer 31

• Enhanced protection provides full protection for the value of the whole of an individual’s pension rights
• Individuals could claim enhanced protection regardless of the value of their pension rights at 5 April 2006, and
• In return for this additional protection, no further relevant benefit accrual could be made to registered pension schemes; the term ‘benefit accrual’ means further contributions to defined contribution schemes or increases in DB schemes greater than 5% or inflation as measured by the retail prices index (RPI).
• Applications had to be made to HMRC before 5 April 2009.
• Enhanced protection can be lost if the individual becomes an active member of a registered pension scheme.

Question 32

What is the taxation of benefits on death for death before 75 and death 75 or over?

Answer 32

Death before 75

• Payments to that individual will be made free of tax, whether it is taken as a lump sum or accessed through drawdown providing that the funds are designated to an income-producing contract, or paid out as a lump sum death benefit within two years of the scheme member’s death
• After 2 years funds designated to provide a lump sum will be subject to a death benefit charge based on the respective beneficiary’s marginal income tax rate.

Death on or after 75

• DC pension savers can nominate who ‘inherits’ their remaining pension fund. This fund can then be taken under the pension flexibility rules, and will be taxed at the beneficiary’s marginal rate as they draw income from it.
• Alternatively, they can take the fund as a lump sum, less a tax charge based on the respective beneficiary’s marginal income tax rate.

Question 33

What is the tax treatment of a refund of benefits?

Answer 33

if a member leaves a DB pension scheme within two years of joining, it is possible to receive a refund of contributions if the scheme rules allow. This only applied to members of a DC scheme if they were a member before 1 October 2015. Members joining a scheme after 1 October 2015 can have a refund if they leave within 30 days of joining. The refund of a member’s contributions whether from joining a DC scheme is the same:

• the first £20,000 is taxed at 20%, and
• the remainder is taxed at 50%.

Question 34

What are Employer-Financed Retirement Benefit Schemes (EFRBSs) and how are the taxed?

Answer 34

EFRBSs are trust arrangements sponsored by a company for those who wish to accumulate pension benefits outside of a registered pension scheme.

Features of EFRBSs

• Employer contributions are not taxable on the employee.
• Employer contributions are not corporation tax-deductible until benefits become payable.
• There is an inheritance tax (IHT) charge when property enters the trust.
• Usual exit charges and periodic charges apply.
• Tax is paid on income and capital gains (unless held offshore).
• There are no investment restrictions.

Question 35

What are the tax treatment of a Qualifying Recognised Overseas Pension Scheme (QROPS)

Answer 35

A QROPS is not subject to any UK taxes, including IHT. However, it does become subject to taxation in the jurisdiction in which it is based (which does not have to be the same jurisdiction in which the client is based).

Since 9 March 2017, transfers to a QROPS are subject to a 25% tax charge unless both the individual and the QROPS are in the same country,