Knowledge Gaps - DCs,DBs & Tax Planning Vehicles Flashcards
What is an investment bond?
A wrapper which is set up as a single premium whole of life policy but is for investmen & to take an income tax efficiently.
When would someone set up an investment bond?
When someone is looking for long term growth, but for when someone has used up all of their pension/ ISA contribution limits, also used for when people want to take tax efficient income from it
How much of an income from an investment bond can be taken each year tax deferred?
5%
What happens if an investor doesn’t take the 5% they are allocated to take in that tax year?
It can be rolled forward yearly up to a max of 20 years
What tax rules are investment bonds subject to?
Income tax rules as opposed to CGT
What is the advantage of an investor having an Investment bond with respect to CGT liabilities?
Not subject to CGT, so allows the CGT allowance to be used in other areas
What happens if an investor withdraws more income over the allowance in an investment bond?
Subject to income tax
What is an onshore bond?
Investment bonds only available to UK residents
What is an offshore bond?
Investment bonds available to UK & non- UK residents
What is the difference between onshore & offshore bonds with regard to tax paid within the bond/
Onshore- assumes 20% tax paid within the underlying funds
Offshore- no tax paid in the bond
What is the difference between onshore & offshore bonds with regard to gains made from the bond?
Onshore- only tax liability for higher (20%) & additional rate tax payers (25%)
Offshore - Income tax paid on standard rates basic (20%) etc.
What is top slicing and why would someone want to use it?
Can spread the tax laibility of an investment bond over it’s lifetime, useful for those who are on the border of a higher tax bracket and a chargeable gain would push them in to a higher bracket.
Which class of NIC contributions can people pay to make up gaps in National Insurance records with regards to state pensions?
Class 3 voluntary contributions
What 3 areas determine what the triple lock will rise by the highest each year?
Earnings
CPI
2.5%
what is the maximum amount eligible for tax relief on pension contributions a year?
Max of £3600 or 100% of UK earnings a year
GIve an example of a relevant UK individual with regards to being eligible to receive tax relief on pension contributions
This is an individual under the age of 75, who in relation
to a tax year:
* has relevant UK earnings chargeable to income tax
for that year;
* is resident in the UK at some time during that year;
* was resident in the UK both:
– at some time during the five tax years
immediately before the year in which the
contribution was made, and
– when they became a member of the pension
scheme; or
* they or their spouse have earnings for the tax
year from an overseas Crown employment subject
to UK tax.
GIve an example of relevant UK earnings with regards to being eligible to receive tax relief on pension contributions
- employment, such as a salary, wages, a bonus,
overtime or commission; - carrying on or the exercise of a trade, profession or
vocation (whether as a sole trader or a partner); - patent rights and which is treated as earned
income; or - an overseas Crown employment, which is subject to
UK tax
Do dividends count as part of relevant UK earnings?
No
Will someone who isn’t a relevant UK individual be able to receive tax relief on pension contributions if they make them?
They can make them, but won’t get tax relief
What are the 2 ways tax relief is given on pension contributions?
Net pay method
Pension Relief at source (PRAS) method
What is the net pay method with regards to tax relief on pension contributions?
When gross pay is reduced by the amount of the contribution BEFORE tax is deducted
What is the Pension relief at source method with regards to tax relief on pension contributions?
Contributions are made net of basic tax rate (20%). then down to the pension provider to reclaim the tax relief from HMRC
Which types of schemes would use the net pay method?
Occupational pension schemes
Whcih ntypes of schemes would use the pension relief at source method?
personal & stakehodler pensions
What is the benefit for an employer to make additional contributions to an employee’s pension?
The contributions are offset as a business expense, this can give corporation tax relief if the employer is a company
How much is the annual allowance on total contributions which qualify for tax relief?
£60k
What is the purpose of the annual allowance?
To see if the member can keep all of their tax relief or whether some has to be returned to HMRC
If the annual allowance has been exceeded, what is the tax on this if a member has to pay it back?
An annual allowance charge is paid at the member’s rate of tax
How much is the annual allowance if someone earns over £360k a year?
£10k
How many annual allowances can a person carry forwards to top us a pension?
3 years worth
What is the Money Purchase Annual Allowance and when is it triggered?
MPAA is £10k a year for contributions when someons starts to take flexible access drawdown from a DC pension
Summarise what the Lifetime Allowance (LTA) was before it was abolished
It was the max amount of money that could be saved in to a pension without incurring a tax charge
How much were the LTA allowances before they were abolished?
£1.5m in 2006 to £1,073,100 when it was abolished
How much was the tax charge for the excess amount of the LTA?
25%
What is the difference in tax treatment between if a person takes their pension as a lump sum, or as an income?
Income is subject to income tax and payable through PAYE
Lump sum has 25% tax free, unless it has exceeded max amount which will then be subject to normal rate of tax
When could a person receive their whole pension as a lump sum if they’re in ill health?
When the member is under 55 and they have a life expectancy of under a year
If a member regains their health can a scheme suspend payment of an ill health scheme pension?
Yes
Give two examples of how a public sector DB scheme differs to a private sector DB scheme
Public sector
- pensions when paid are inflation protected
- better treatment to members when looking to retire early e.g ill health
- Transfer club allows the pension benefits to stay the same across different public sector areas
What 3 factors determine how much a member of a DB scheme will receive in retirement?
Pensionable service
Pensionable salary
Accrual rate
What is the accrual rate with regards to DB pensions?
% or fraction that determines how much of your salary you’ll earn as pension for each year of service (e.g 1/60th of yearly salary)
What form will be filled in by member to outline where the benefits of a DB scheme will go if they were to die in service?
A nomination form (expression of wish form)
If someone dies after retirement and has a DB scheme, what are the 2 usual instances that could occur?
1) A guarantee period could allow benefits to keep being paid (e.g 10 years)
2) Pension can continue to be paid to a spuse/ dependant - fixed amount (50%)
What is the difference between an occupational pension scheme and a group personal pension plan?
Occupational scheme is set up on behalf of employees, a group personal pension is lots of individual contracts with each employee
What is a personal pension?
A private pension you can set up on your own, usually for the self employed
What is a stakeholder pension?
A low cost personal pension for those who want to save small amounts
What minimum standards are stakeholder pensions subject to?
TThe Charges, Access & Terms standards (CAT)
is there an income tax charge for recipients if a DC member died in service before 75?
No
