Pension Build Up & Misc. Flashcards
State the two methods of tax relief.
Net pay method.
Relief at source method.
Explain how the net pay method tax relief works.
Only with Defined Benefit schemes. Only occasionally with Occupational DC schemes.
Contributions are taken from gross pay before income tax is deducted.
Member receives full tax relief at marginal rate (state rate from case study).
Only available for employer sponsored, trust based schemes.
Explain how the relief at source tax relief method works.
Contribution is paid net of basic rate tax from net income. 20% relief at source. Higher (& or additional) rate tax reclaimed via self assessment tax return by extending the basic (& higher if applicable) rate band by the GROSS contribution.
What is the Annual Allowance available for PAT1 (Pre alignment tax year)?
Up to £80k
What is the Annual Allowance available for PAT2 (Post alignment tax year)?
Nil
DB apportionment for the AA test:- what are the number of days between 8th July 2015 & 5th April 2016?
272 days
Explain how the Annual Allowance charge works.
It is the individuals responsibility to work it out.
If excess pension saving exists this is added to the members taxable income.
Any pension saving:-
Above the individuals higher rate limit is taxed at 45%
Between the basic & higher rate limit is taxed at 40%
Below the individuals basic rate limited is taxed at 20%
Who pays the Annual Allowance charge?
If DB scheme, an actuarial calculation is done to reduce members benefits.
If DC scheme, the member can elect for the scheme to pay where:
The AA charge exceeds £2k AND
The total amount exceeded is with one pension provider
If member has two pension plans with two providers & both exceed the AA (eg £25k into two different providers, & £10k over, member will have to pay AA charge)
What factors could affect future pension contributions for an individual?
- Income & PCLS requirements in retirement.
- Intended retirement date.
- ATR
- Affordability
- Existing pension entitlement & state pension. Will they continue to work in retirement?
- Other sources of income in retirement/inheritances.
- Health
- Need to provide a dependents income.
- Assumptions re growth & inflation.
- Current & likely future tax rate.
- Likely format of benefits/intended method of taking income.
What is an In Specie Contribution (in summary)?
Contributor declares a monetary amount they wish to make as a contribution. (If relief at source scheme, the amount can be the net amount)
A legal, irrevocable debt is created, which the contributor must settle.
Agreement made that the debt can be settled by the in specie contribution.
If assets market value is less, the balance must be paid. If higher, the difference is returned to contributor as cash.
Describe the features of an SMPI.
It’s a Statutory Money Purchase Illustration.
DC scheme members must receive one annually.
Benefits are illustrated AFTER charges:-
Growth rate set by provider
Projection in today’s terms (using 2.5% inflation)
Actual charges taken into account (or 1% if not known)
Future contributions taken into account if regular (if earnings related, increased by 2.5%)
Annuity income calculated based on annuity rates determined each 15th February:-
PCLS can be deducted
Monthly in advance
No requirement for increases
Survivors pension at providers discretion
Expenses AT retirement assumed 4%
At what timescale from a members SRA does a lifestyle fund start to gradually switch funds into cash & fixed interest?
Within 5-10 years.
At a members SRA, what funds will a members pension be invested in if they’re in a Lifestyle type fund?
25% cash. 75% fixed interest.
What are the four drawbacks of Lifestyle investments?
- Assumes full PCLS will be taken & an annuity purchase with rest, therefore not suitable for Drawdown or phased retirement.
- Only works in member is sure of annuity purchase date. If earlier than expected, too much will be in equities with potential for losses if markets low. If later, funds will spend too long in secure assets with potential loss of growth.
- Automatic switching of investment ignores market timing issues.
- May be higher risk than member realises.
What four criteria must be met for recycling of PCLS to be treated as an unauthorised payment?
- Tax free lump sums taken in any 12 month period exceeds £7,500 AND
- The contribution made is ‘significantly greater’ than it would other be (usually 30% greater) AND
- The cumulative sum of the extra contributions exceeds 30% of the PCLS AND
- The recycling was ‘pre planned’
What charges would an individual be subject to if he made an unauthorised payment, e.g. Recycled PCLS?
40% unauthorised payment tax charge payable by the member AND POSSIBLY
An unauthorised payment surcharge of 15% AND
A scheme sanction charge of between 15% & 40%.
Charges are based on total PCLS taken in last 12 months, not just the recycled PCLS!
Name 5 different ways of funding retirement income.
- Personal pension
- ISA
- Residential property
- Own business
- EIS/VCT/SEIS
What are the 5 benefits of funding personal pensions for retirement income?
- Conts gain tax relief at marginal rate
- Tax advantaged growth
- 25% available tax-free
- Death benefits typically free of IHT
- Enforced savings discipline to age 55
What are the 5 drawbacks of funding personal pensions for retirement income?
- Benefits can’t be drawn before age 55
- Income from at least 75% must be taxed as earned income
- Restrictions on amount of tax relief available
- Restrictions on where funds can be invested
- Complex & costly
What are the 4 benefits of using ISAs to fund retirement income?
- Tax advantaged growth
- Both income & capital paid free of all taxes
- Whole fund can be taken as capital
- No minimum age for taking benefits
What are the 4 drawbacks of using ISAs to fund retirement income?
- No tax relief on contributions
- Max contribution £15.240 pa
- Forms part of estate on death
- Investment range restricted
What are the 5 benefits of residential property as an investment?
- Cost of borrowing can be offset against rental income for tax purposes.
- Investment can be self-financing.
- Capital gains taxed at a lower rate than income tax.
- No restrictions on the amount you can invest.
- Rental income can be used to provide income in retirement.
What are the 6 drawbacks of residential property as an investment?
- Lack of diversification.
- Requires large capital outlay to purchase.
- Maintenance costs can be high.
- Void periods.
- Potential lack of liquidity.
- Can be hard to obtain finance.
What are the 5 benefits of investing in your own business?
- Ready sources of business finance.
- Limited Co. profits are subject to corporation tax which is less than income tax.
- BPR
- Entrepreneurs relief
- Confident in the investment/knowledge of the investment.
What are the 3 drawbacks of investing in your own company?
- Lack of diversification- both income & pension income depend on the business.
- Date of retirement may not coincide with a good time to sell the business.
- There may be better performing investments available.
Name 5 benefits of EIS/VCT/SEISs
High annual limits
Tax reducer relief on contributions
EIS can relate back one tax year
BPR after 2 years in EIS
Not age related to draw benefits
Name 3 drawbacks of EIS/VCTs
Lack of diversification- high risk UK unlisted companies
Complexity
Liquidity
What would be the tax treatment for someone who takes retirement benefits as a lump sum due to serious ill health?
Benefits can be paid tax-free as a lump sum up to the lifetime allowance if before age 75.
What is HMRCs definition of a ‘dependent’?
Spouse
Children 22 & under
Children 23 & over & financially dependent
Anyone financially dependent
Disabled
Explain the criteria that must be met to qualify for ill health early retirement.
Scheme administrator must be satisfied that the member satisfies the schemes definition of ill health.
Must obtain qualified medical opinion.
Member must have ceased working.
Triggers a BCE but no 2.5%pa reduction in LTA.
Benefits paid as normal, eg taxable income plus PCLS. Income could be pension scheme annuity or drawdown pension.
Pension in payment can be reduced or stopped if health improves.
What must the trustees do upon identification of a scheme deficit?
Consult with the employer
Take advice from the schemes actuary
Put together a recovery plan aimed at making up the shortfall
Produce a schedule of proposed contributions
Inform TPR and monitor the position
What must the trustees take into account when developing a Recovery Plan?
Sponsoring employers financial position & willingness to maintain funding.
Scheme membership profile.
Likely benefits available to members of employer becomes insolvent in short term.
Potential disruptive effect on funding of any impending changes.
The effect of assumptions in the recovery plan not being met.
The anticipated level of the risk based PPF levy.
