Contributing to Pensions Flashcards
What is the maximum age to make pension contributions
Under 75
Where the extra tax relief is claimed via self-assesment
how is this acounted for
The gross amount of the contribution is added to the employee’s basic rate tax band. This provides the additional tax relief by increasing the amount of income taxed at 20% (rather than 40%) or 40% (rather than 45%)
In respect of employer contributions what test is applied to make sure that contributions qualify for tax relief
The tax relief will be awarded if they pass the “wholly and exclusively” for the purposes of trade test.
What is ANI (Adjusted Net Income)?
ANI is total grossed up income in the tax year from all sources less certain deductions e.g. Charity Contributions or trading losses. Another deduction is the gross value of personally made pension contributions.
When is ANI applied?
1) Those who claim Child Benefit and have one person in the household has an ANI of more than £50k
2) Individuals with ANI over £100 will lose £1 for every £2 over £100k. IE at £123,000 the entire personal allowance of £11,500 (17/18) is lost.
Recycling of PCLS.
What are the 6 conditions that were all met will lead HMRC to treat the entire PCLS as an unauthorised payment?
- The individual receives a PCLS which when added to any other PCLS drawn in the previous twelve months exceeds £7,500.
- The PCLS means that the pension contribution paid on behalf of the individual is significantly greater than it would otherwise have been.
- ‘Significantly Greater ‘is taken to be ‘more than 30%’ of the contributions that might otherwise have been expected.
4 And the cumulative sum of extra contributions exceeds 30% of the PCLS
- The additional contributions can be made by the individual or by someone else, such as an employer.
- The recycling was pre planned.
Why did Chris case not break PCLS recycling rules?
Check on SL and notes from Pensions marketing.
Consideration. Where client is over 75 and/or has no relevant UK earnings should he make a pension contribution in order for funds which would otherwise be subject to IHT to be excluded from the estate?
Plus -
Reduces IHT by 40%
Minuses -
No relief on pension contribution
Tax for beneficiaries on withdrawal
Annual Allowance
When was the Pension Input period (PIP) changed to coincide with the tax year in all cases?
Summer Budget 2015
There were transitional rules for 2015/16
What is the Annual Allowance Charge (AAC)?
Where the total input amount exceeds the allowance. The excess is charged at the individuals tax rate. This is calculated by adding the excess to the NAI to see what tax rate payable.
What is ‘Scheme pays’?
Where the AAC exceeds £200 the member may have the right to elect for the scheme administrator to pay some or all of the charges on their behalf.
What are Key dayes in changing Annual Allowance rules?
13/14 - AA = £50,000
£40,000 thereafter
Although 15/16 two mini tax years. up to 8th July and After 8th July 15.
MPAA rules came in reducing all those who want to access funds flexibly from drawdown had a £10,000 annual allowance imposed. This is to be reduced to £4000 from 17/18
Does MPAA apply to those accessing income on fixed drawdown basis? What if they change how much they take as an income?
Find out answer
Pre - Alignment Tax Year
6 April 15 to 8th July 15. Annual allowance of £80,000 with maximum CF of £40,000 to the post alignment mini tax year 9th July 2016 to 5 April 2016.
What are present AA rules for High Earners?
Subject to two tests High Earners will have their AA tapered.
What are the two tests?
Net Income is :Gross Income less Allowable deductions and net pay contributions to an employers pension scheme. Note Relief at source pensions contributions are not deducted.
Test 1) Threshold Income + Net Income PLUS salary that has been sacrificed for pension contributions. (Only for SS arrangements starting on or after 9th July 2015
LESS
the gross amount of any relief at source contributions
LESS
Any gross gift aid charity donations made in tax year.
where Threshold income does not exceed £110,00 there is no need to carry out Adjusted Income Test.
Test 2) Adjusted Income Test
Meets test at £150,000
Net Income PLUS Any Gross Net Pay contributions PLUS Employer input value.
What is Employer input value in the context of the previous question?
Money purchase premiums paid into members policy in the tax year
or
input value of a DB net of the employee pay contributions. EG If DB input value for the year was £38,500 but the member had put in net pay contributions of £2,500 the employer input value for Adjusted income purposes would be £36,000.
The total of Net Pay contributions and Employer input value = the TOTAL DB Pension Input amount (DB PIA)
What is formula for calculating Pension Input for a DB scheme? Look at scheme with following assumptions. 1/80th scheme with 3/80ths lump sum Pensionable income Year 1 = £76,000 Pensionable Income Year 2 £79,000 CPI 4% Service to date 30 years AVC contribution
Year 1
([30/80x£76,000]x16) + (90/80x£76,000) = £456,000 + £85,500 = £541,500
+cpi 4% = £563,160
Year 2
([31/80x£79,000] x 16) + (93/80 x £79,000)+ £489,800 + £91,837.50 = £ 581,637.50
Deemed contribution = £581,637.50 - £563,160 = £18477.50
What is formula for :
Net Income
Threshold Income
Adjusted Income
Net Income =
Gross Income
- Allowable Deductions
- Net Pay contributions
Threshold Income =
Net Income
+ salary sacrifice for new schemes after 9 April 2015
- PRAS
Adjusted Income=
Net Income
+NP Contribution
+Employers Input Value (Total Contribution less NP contribution)
Remember PRAS only applied to Threshold Income
-
Threshold Income
Adjusted Income
+
+
What are the rules for allowing death benefits to be paid tax free?
Subject to deceased member being below age 75 and the beneficiaries informing the scheme administrator within 2 years of death of member.
How does the Guarantee credit element of Pensions Credit work?
How guarantee credit works
Guarantee credit tops up your weekly income to £159.35 for single people and £243.25 for couples in 2017/18. To qualify for it, you must:
live in the UK
have reached pension-credit qualifying age (the same as state pension age) if you’re a woman
have reached the state pension age of a woman born on the same day as you if you’re a man
have weekly income below £159.35 if you’re single and £243.25 if you’re in a couple.
If you’re a carer, have severe disabilities or certain housing costs, you might qualify for more guarantee credit.
When you apply for guarantee credit, the government looks at all of your income. This includes both your basic and additional state pension, any income from other pensions, income from any jobs you have and any savings over £10,000.
Some benefits, such as housing benefit, council tax reduction and attendance allowance, aren’t included, nor are your personal possessions or your home.
How does the Savings Credit Element of Pension Credit work?
How savings credit works
The government will give people a little extra money to reward them for saving towards their retirement. This comes in the form of savings credit, which has now disappeared for those reaching state retirement age after April 2016.
There’s a few criteria that you needed to meet (and still do) before you qualified for savings credit:
you have a minimum income of £137.35 a week if you’re single, and £218.42 a week if you’re in a couple in 2017/18
you or your partner must be 65 or over
you must be living in the UK
you must have made some provisions for your retirement, such as savings or a second pension.
The way it’s calculated works like this: for every £1 by which your income exceeds the savings-credit threshold (£137.35 for a single person in 2017/18 and £218.42 for a couple), you get 60p of savings credit.
So, say you have an income of £122.30 a week from the basic state pension, and an income of £30.05 a week from a private pension, your total weekly income would be £152.35
Your weekly income is £15 over the savings-credit threshold. This means you would qualify for £9 a week of savings credit.
The maximum savings credit you can get per week is £13.20 for a single person and £14.90 for couples.
If your income is less than or equal to the savings-credit threshold, you won’t qualify for this benefit.
State Pension
What are changes in ages to qualify for state pension ?
Up to Nov 18 - Females move to age 65
Nov 2018 to 2020 moves from 65 to 66
2026 to 2028 moves from 66 to 67
2044 to 2046 moves from 67 to 68
State Pension Changes
Qualifying rules?
Old (pre 6/4/2016)
Min 1 year NI contributions
30 years for max BSP
Use former spouses credit
New
Min 10 years
35 Years for max STP
Own record only
State Pension rule changes
What are Deferment Rules
Old
5 weeks at 1% (10.4%)
Cash option after 12 months
Spouse inherits on death during deferral
New
9 weeks at 1% (5.8%)
No cash option
3 months payments claimed at best on death
Set Pension Rule Changes
What are the amounts?
New Single Tier State Pension (STSP)
No more contracting out
Protected amount for people who had accrued more benefits under old scheme (CPI Linked)
People with insufficient NIC credits will have. A Foundation amount (lower than STSP)
No deferment for cash commutation for eligibility post 6/4/16
No more use of someone else’s NI history to claim pension
What are rules on transferral of personal allowance?
Can only be transferred to basic rate tax payer
Recipient could make pension contribution to widen Basic rate tax band
Transfer between married couples and civil partners only
Can go back 2 years
Can be done online or over the phone
Systematic risk is where an individual stock isn’t effected in isolation but the whole sector pr whole market falls. What is Systemic Risk?
Systemic Risk is where there is a domino effect which risks pushing financial markets into melt down
How are chattels taxed for CGT?
Chattels (i.e. tangible movable property) are completely exempt from CGT if the value at
disposal does not exceed £6,000. This limit applies per person where a married couple jointly
owns a chattel.
Where the disposal proceeds exceed £6,000, the chargeable gain cannot exceed five-thirds of
the excess over £6,000. For example, if a ring costing £1,000 is sold for £7,800, the chargeable
gain cannot exceed £3,000 ((£7,800 – £6,000) × 5/3). Therefore, the chargeable gain is £3,000,
rather than the ‘actual’ gain of £6,800.
Tangible movable property which is a wasting asset (i.e. with an expected life of less than 50
years, such as a yacht) is completely exempt from CGT. However, this exemption does not
apply to plant and machinery used in a business where capital allowances have been claimed
– but note that motor cars (see below) are always exempt regardless of business use.
What are rules on Entrepreneurs Relief
Must have held asset for 1 year min
Available for sole traders, partnerships or 5% shareholder
10% rate
Lifetime limit off £10,000,000
Has to be trading company
Can use Annual CGT limit £11,300
Tax due on 31st January following end of tax year in which disposal made . Ie disposal made in 17/18 would result in tax being paid on 31 Jan 2019
How does Primary protection work?
Gives an individual with pre 6/4/2006 pension rights in excess of £1.5m a higher LTA using Primary Protection Factor (PPF)
The factor is rounded up to 2 decimal places.
The formula is
Value of pension rights on 5/4/2006 - £1.5m
———————————————————-
£1.5m
Since 6/4/2012, the PPF is always applied to £1.8m (underpinned LTA)
Contributions can be continued to be made and/or benefits accrue after A Day
LTA Charge is applied to excess over personal LTA
Calculate the personal LTA for Ben.
Pension rights of £2.1m on 5/4/2006
Primary Protection Factor =
(£2.1m - £1.5m). £600,000
———————- = ——————————— = 0.40 0r 40%
£1.5m. £1.5m
PPF is applied to underpinned LTA of £1.8m
Therefor
£1.8m + (£1.8mx40%) = £2.52m
Question
Dave has primary protection in respect of his pension rights on A Day. However he does not have a protected tax free cash lump sum. What is is his entitlement to a tax-free cash lump sum?
Anyone with primary protection, who does not have a protected tax-free cash lump
sum, will still be able to take a tax-free cash lump sum of up to 25% of £1.5 million. This rule
will similarly apply to enhanced protection.
How does enhanced protection work?
Any one with benefits at 6/4/2006 could register for enhanced protection. Including those with benefits below LTA (if individual felt there was a risk that funds would exceed LTA in the future)
No further contributions could be made. some complicated exceptions for DGBs schemes where limited further payments can sometimes be made.
Also DIS cover in place before 6/4/2006 can continue.
Subject to no further contributions rule above then under Enhanced protection an individual is not subject to LTA charge when benefits taken.
