Pension & FAD Flashcards
Benefits and Drawbacks of Pension Contributions
Benefit
- Maximise income tax relief
- Capital removed from estate (IHT)
- Increase retirement income /PCLS
- Potentially better Returns than cash
Drawbacks
- Short time frame until retirement
- Have to source capital from somewhere
- Potentially increase lifetime allowance - potential charge
Defer State Pension + Benefits (5/4/2016)
If SPA is before 6/4/16
- 5 week minimum deferral
- 1% increase per 5 weeks (10.4% p.a.)
- option to commute deferred payments for a lump sum after min of 52 weeks
- int. on deferred payments is 2% above BoE base rate
- increased pension income is taxed at marginal rate
- lump sum tax at marginal rate but can not take you into next tax bracket
- spouse inherits deferred benefits on death if still in deferment
Deferring state pensions post 06/04/16
- 9 week minimum deferment
- 1% per 9 weeks (5.77% p.a.)
- no lump sum commutation option
- estate can only claim a maximum of 3 months deferred payments
Benefits
• Increased pension when drawn
• Can defer the gross income to a future tax year when earnings will be lower / reduce IT on the income.
• taxed at the marginal rate of tax for the tax year in question. payment cannot push her into a higher tax bracket.
PCLS Protection Calc
Pension ABC Ltd EPP
Fund at 6th April 2006 - £240,000
PCLS at 6th April 2006 - £100,00
Current fund value - £540,000
Pension ABC Ltd EPP
Fund at 6th April 2006 - £240,000
PCLS at 6th April 2006 - £100,00
Current fund value - £540,000
Step 1 - £100,000 x £1.8m / £1.5m (1) = £120,000 (1)
Step 2 - he has FP 2012 at £1.8m
Step 3 -
£540,000 - (£240,000 (1) x £1.8m/£1.5m (1)) x 25% (1) =
(£540,000 - £288,000 (1)) x 25% =
£252,000 x 25% = £63,000 (1)
£120,000 + £63,000 = £183,000 (1)
pension increase exchange (PIE) features
- Excellent health/family history of longevity. - likely to receive more over his lifetime if non PIE.
- Non Pie creates surplus but they have other non pension funds.
- Lose all non statutory increases.
Inflation Inc. mean within Capacity for loss - Spouses pension untouched.
- Is the non Pie option sufficient to meet income needs? (net/gross)
FAD vs Enhanced Annuity
Enhanced Based on current health - If recovers then could receive more.
Annuity guaranteed (matches Cap. For loss) - FAD can run out.
No Flexibility to amend if more or less income needed. - pay more tax?
Annuity = Low Risk, but FAD could grow!
Annuity must select Indexation for inflation.
FAD could allow some income from PCLS.
FAD outside estate - is there IHT issue?
FAD taxable - PA element tax free
FAD flexible - income varied
FAD - likely outside a Lower-Med ATR
FAD - can purchase Enhanced Ann at later date.
FAD - Ongoing reviews costly and complex.
Annuity - Death benefits payable and tax treatment
Death benefits payable
- Income in respect of the balance of the guarantee periods;
- The guarantee payments can be commuted for a lump sum if the value of payments remaining >£30,000.
Tax treatment
- Continuing income under the guarantee will be tax-free (under 75 for the entire guarantee period.)
- Any trivial commutation lump sum is taxable as earned income under PAYE.
Annuity Protection vs Guarantee
Annuity protection
* Allows a lump sum (after tax if applicable) paid on death of annuitant
Guaranteed period
* A minimum period of time for which an annuity will be paid, irrespective of how long the individual lives.
FAD - Death benefit options Income Tax treatment
Options
Lump sum.
Nominees’ flexi-access drawdown.
Nominees’ lifetime annuity.
Tax treatment
Before age 75 the lump sum/ income will be tax free if designation/payment takes place within the two-year window.
Otherwise the payment will be taxed as the recipient’s earned income under PAYE.
Explain the reasons for recommending APT
- This will give wife a life interest in the pension fund.
- She will be able to receive an income or loans from the trust with any loans repayable on her death.
- Repayment of loans reduces wife’s estate for IHT.
- Daughter and wife can be appointed trustees.
- By specifying Daughter as future beneficiary it ensures daughter receives residual funds on wife’s death and wife cannot nominate her own successors.
Describe the tax treatment of the APT
- If dies before 75 - funds paid to APT tax-free as long as the payment is made within the two-year window.
- If at 75 - subject to a 45% tax charge.
- Funds held in APT not part of wife or daughter’s estate for IHT.
- Payments from APT subject to exit charges/funds held within the APT may be subject to periodic charges.
- Income to beneficiaries will be trust income paid with a 45% tax credit, some or all of which can be reclaimed based on their individual tax position.
- Income within the trust benefits from a BRT band £1,000 + balance taxed at 38.1% (Div) & 45% (non-Div)
- CGT exemption £5,850, then taxed at 20%.
- Funds outside of Wife & Daughter’s estates in the event of bankruptcy/divorce/remarriage.
UFPLS for £25,000 net. Existing income of £34,350
Basic rate band remaining in 2018/19
- £34,350 income received in 18/19 - £11,850 personal allowance = £22,500 taxable income.
- Basic rate band remaining therefore: £34,500 - £22,500 = £12,000.
UFPLS within basic rate band
- £12,000 taxable UFPLS/ 0.75 = £16,000 gross UFPLS within BRB.
- 25% of this (£4,000) is tax free and the remaining £12,000 is taxed at 20%, providing £9,600 after tax.
- In total, the first £16,000 UFPLS will provide £4,000 + £9,600 = £13,600 income after tax.
UFPLS within higher rate band
- £25,000 - £13,600 = £11,400 more income required.
- Each £100 crystallised that falls in the higher rate tax band will produce (£100 x 25% = £25 tax free) + (£100 x 75% x 60% = £45 after Income Tax).
- In total, each £100 crystallised will provide £70 of income after Income Tax.
- Therefore, a further £11,400/ 0.7 = £16,285.71 must be crystallised.
Total crystallised
* £16,000 + £16,285.71 = £32,285.71 gross UFPLS to produce £25,000 of net income.
Fixed Protection 2016 and Individual Protection 2016
State the two forms of transitional protection in order to reduce the likelihood of incurring a lifetime allowance tax charge, and explain the benefits of holding both forms.
- Can register for individual protection 2016 (IP16) and fixed protection 2016 (FP16).
- FP16 will give LTA of £1.25 million.
- IP16 will give LTA of the value (between £1m and £1.25m)
- Register for both as if further contributions – will lose FP16 but will still retain IP16.
lifetime allowance tax charge
Capped Drawdown - £21,000 pa
PP held with £1.2m
Fixed Protection 2014 and IP 2014 held
- Value of capped drawdown assessed against LTA is calculated as: £21,000 (max GAD income) x 25 x 80% = £420,000.
- This is added to the current value of the PPP (i.e. £1,200,000) to give a total of £1,620,000 to be assessed against LA of £1,500,000. Fixed Protection 2014
- The excess over the LA is £1,620,000 - £1,500,000 = £120,000.
- This is taxed at 25% (as FAD is an income producing contract), leaving a lifetime allowance tax charge of £120,000 x 25% = £30,000.
LTA calculation on offer of pension increase
exchange.
Scheme pension at NPA - £42,000
Late retirement enhancement factor - 3% pa
PIE - PRE-commutation pension increase - 29%.
Increase in pension for late retirement £42,000 + 6% = £44,520. Pension if PIE is accepted £44,520 x 1.29 = £57,430.80 Amount subject to LTA tax charge £57,430.80 x 20 = £1,148,616; - £1,030,000 = £118,616. LTA tax charge £118,616 x 25% = £29,654.
Explain why it is important to complete a nomination form in favour of children in respect of the inherited capped drawdown fund.
If client wants the Pension/Drawdown to be paid to her children rather than the spouse.
- Completing the nomination form allows the trustees to know who the member wants to receive the funds on death although the trustees still have discretion over who receives the funds on her death.
- Without a nomination form the trustees are likely to pay funds to spouse as the dependant.
- Even if the trustees chose to pay the funds to children, as they are not dependants then without a nomination form in their favour the scheme administrator cannot offer the grown up children the option of an income if spouse still alive.
- Instead, the only option would be a lump sum death benefit, which would form part of their estate for IHT purposes / which cannot remain in a pension fund for their beneficiaries.
