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Pension Taxation UK Flashcards

To give an overview of the taxation of UK pension schemes.

1
Q

What is an occupational pension scheme?

A

A scheme set up by an employer to provide retirement benefits for its employees and their dependants.

Defined in Pension Schemes Act 1993, s.1.

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2
Q

What are the different kinds of occupational pension scheme?

A

(i) A defined benefits scheme
(ii) A defined contribution scheme.
(iii) A hybrid scheme.

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3
Q

What is a defined benefit scheme?

A

An occupational pension scheme (or other retirement benefit scheme) that promises a member a defined level of benefit on death or retirement.

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4
Q

What is a final-salary scheme?

A

An occupational pension scheme aiming to provide (by way of pension) a proportion of an employee’s final income at retirement. The proportion usually varies with the length of scheme membership and earnings near retirement date.

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5
Q

What is a defined contribution scheme?

A

A pension fund where the benefits payable are calculated by reference to the contributions made (as increased by the investment return achieved).

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6
Q

What is a money purchase scheme?

A

A defined contribution scheme.

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7
Q

What is drawdown pension?

A

An alternative way for a member of a defined contribution scheme to take pension benefits.

If they are at normal minimum pension age (or meet the ill-health criteria) the member may (i) use income withdrawal OR (ii) buy a short-term annuity.

FA 2004, s.165

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8
Q

What is income withdrawal?

A

One of the two ways in which a member of a defined contribution scheme can take drawdown pension.

The member can withdraw an annual income, leaving the rest invested.

The member can designate funds to a flexi-acess drawdown fund OR to an existing capped drawdown fund (established pre 6 April 2015).

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9
Q

What are the two ways in which a member of a defined contribution pension scheme can take drawdown pension?

A

(1) income withdrawal

(2) short term annuity

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10
Q

What are the two ways in which a member of a defined contribution scheme can take income withdrawal from 6 April 2015?

A

(1) They can designate funds to a flexi-access drawdown fund.
(2) They can designate funds to an existing (pre 6 April 2015) capped drawdown fund.

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11
Q

What is a flexi-access drawdown fund?

A

From 6 April 2015, a means of allowing a member of defined contribution arrangement under a RPS (or their dependants, nominees etc. after death) to draw an income, if allowed by the scheme rules.

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12
Q

What are the annual limits on withdrawals from a flexi-access drawdown fund?

A

There are no limits.

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13
Q

When can a member of a defined contribution arrangement designate their funds as available for income drawdown?

A

When the member reaches normal minimum retirement age OR meets the ill-health condition.

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14
Q

What is normal minimum retirement age?

A

The youngest age at which a member of a RPS can ordinarily expect to take his benefits.

FA 2005, s.279(1) - 55 from 6 April 2010 and 50 before that.

There are transitional provisions protecting members with a preexisting right to draw an early retirement pension under 55.

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15
Q

What is a capped drawdown fund?

A

A form of drawdown pension available to members of a defined contribution arrangement under a RPS.

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16
Q

What is the limit on the income withdrawals from a capped drawdown fund?

A

150% of the value of a comparable annuity.

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17
Q

When can a member designate further funds to a capped drawdown arrangement?

A

Only where the arrangement existing prior to 6 April 2015. Otherwise, they must designate funds to a flexi-access drawdown fund.

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18
Q

Why is it important to register a pension scheme with HMRC?

A

Because only registered pension schemes can benefit from beneficial tax treatment.

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19
Q

What is a pension scheme?

A

A scheme (or other arrangements) comprised in one or more instruments or agreements having (or capable of having effect) so as to provide benefits in respect of persons:

(a) on retirement;
(b) on death;
(c) on having reached a particular age;
(d) on the onset of serious ill-health or incapacity; or
(e) in similar circumstances.

FA 2004, s.150(1).

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20
Q

What is an occupational pension scheme?

A

A pension scheme established by an employer(s) having (or capable of having) effect so as to provide benefits to or in respect of any or all of the employees:
(a) of that employer(s);
(b) OR any other employer.
This is regardless of whether it is also capable of providing benefits to others.

FA 2004, s.150(5).

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21
Q

When must an occupational pension scheme be established under irrevocable trusts?

A

Before 6 April 2006, it had to be in order to qualify for tax favoured treatment.

Now this requirement does not apply to a ‘pension scheme’ (under FA 2004.

However, special DWP legislation dictates that an OPS that has its main administration in the UK must be established under irrevocable trusts if it is funded (which most are).

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22
Q

What is a ‘funded’ occupational pension scheme?

A

The scheme receives payments from the employer for the purposes of providing benefits, rather than simply providing benefit promises to members without backing from separate assets.

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23
Q

How do HMRC treat schemes that were unapproved schemes before 6 April 2006 and did not apply for registration?

A

As EFRBS.

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24
Q

What is an EFRB?

A

An employer financed retirement benefit scheme: generally they do not benefit from tax privileges that registered schemes enjoy, except to a limited extent under transitional provisions in FA 2004.

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25
What is a death benefit only scheme?
A scheme that provides only death benefits for its members. It used to count as an occupational pension scheme and could be an 'exempt approved scheme' for tax purposes. It probably no longer qualifies as an occupational pension scheme (since Sept 2005). However, it can still be a registered pension scheme.
26
What are the tax benefits for registered pension schemes?
(1) Employers and employees can claim tax relief on contributions. (2) Contributions made by an individual's employer are not liable to income tax or NICs. (3) Income from investment returns is usually exempt from income tax. (4) Gains on realising investments are usually exempt from CGT. (5) VAT payable by employers on management services provided by a third party relating to a funded pension scheme is recoverable (but issues re recoverability of VAT on investment services).
27
What is the lifetime allowance?
The maximum amount of saving that a member can make in a registered pension scheme without incurring tax charges. The amount has been reduced in previous years, but there are various transitional protections for those who made pension savings in the expectation of the lifetime allowance remaining at a certain level.
28
What is the standard lifetime allowance for 2019/20?
£1,055,000 (index linked rise from £1M in 2018/19)
29
What happens if the lifetime allowance is exceeded?
The scheme administrators test the total capital value of a members pension and lump sum benefits from all registered pension schemes AGAINST the lifetime allowance ON benefit crystallisation events. If the total exceeds the LTA, a tax charge arises.
30
What are the main forms of transitional protection for charges where the lifetime allowance is exceeded?
(1) primary protection. (2) enhanced protection. (3) fixed protection 2012. (4) fixed protection 2014 and individual protection 2014. (5) fixed protection 2016 and individual protection 2016.
31
What is primary protection?
A member who registered for primary protection for his benefits (with a value of more than £1.5M on 6 April 2006) gained a personal LTA equal to the value of their pre 6 April 2006 benefits. The member could continue to accrue pension after 6 April 2006 without triggering a LTA charge.
32
What is enhanced protection?
Available for a member regardless of the value of his benefits, provided he had some pre 6 April 2006 benefits. It disapplies the LTA when the protected pension rights come into payment.
33
What is fixed protection 2012?
For individuals with pre 6 April 2012 benefits, who can (provided certain conditions are met) retain the £1.8M LTA (rather than the reduced £1.5M).
34
What is fixed protection 2014?
For individuals with pre 6 April 2014 benefits, who can (provided certain conditions are met) retain the £1.5M LTA (rather than the reduced £1.25M).
35
What is individual protection 2014?
For individuals with pre 6 April 2014 benefits, who can have a personalised LTA (of the value of their pension savings up to max of £1.5M).
36
What is fixed protection 2016 and individual protection 2016?
Individuals with pre 6 April 2016 benefits can apply to have a higher LTA apply to them (in certain circumstances) which they claim at the time of drawing their benefits.
37
What is the annual allowance?
The limit of the value added to a member's pension savings in a given year. Currently £40K. Value can be added by way of (i) contribution or (ii) additional accruals in a DB arrangement.
38
What happens where the annual allowance is exceeded?
The annual allowance tax charge arises.
39
What is the annual allowance taper?
The annual allowance is tapered for high earners, so that where the member has adjusted income (including contributions) of £150K or more (subject to an income floor of £110K, excluding contributions) the annual allowance is reduced. The reduction can be up £30K (i.e. down to £10K),
40
At what level of adjusted income will a person's annual allowance be reduced to £10K?
£210K
41
What tax relief can be claimed by individual members?
An individual who is an active member of a RPS who is a relevant UK individual can claim personal tax relief in respect of relievable pension contributions paid during that tax year. FA 2004, s.188
42
What is a relevant UK individual for the purposes of claiming personal tax relief in respect of pension contributions?
(1) the person (P) has earnings chargeable to UK income tax in that year (2) they are UK resident at some point during that year. (3) they were UK resident at some time in the previous 5 years and when they became a scheme member; (4) they or their spouse have earnings subject to UK tax from overseas Crown employment.
43
What are relievable pension contributions?
Contributions made by or on behalf of the individual under the scheme other than excluded contributions.
44
What are excluded (non-relievable) pension contributions?
(1) contributions paid by members over 75; (2) life assurance premiums; (3) employer pension contributions; (4) contributions resulting from an order of the court where a member is liable for an unauthorised member payment.
45
How is relief given on contributions to individual members?
(1) Net pay arrangement; (2) Relief at source; (3) Relief on making a claim.
46
What is a 'net pay arrangement'?
Where HMRC allows employers sponsoring occupational pension schemes to deduct an employee's pension contributions from his gross salary before PAYE operates. This means that higher rate tax payers obtain full relief and their marginal rate.
47
What is 'relief at source'?
Where contributions are deducted from employee's net pay after tax has already been deducted. The pension provider/scheme must reclaim relief at the basic rate from HMRC. The individual must claim any additional relief (at his marginal rate) through self-assessment.
48
What is 'relief on making a claim'?
Where an individual seeks full relief for personal pension contributions through self-assessment.
49
Does the definition of relievable pension contributions include contributions made in specie?
Yes, provided that (A) the member agrees to make a monetary contribution (with a clear obligation on the member to pay a contribution of a specified sum of money to as to create a recoverable debt obligation) and (B) there is a separate obligation between the scheme trustees and the member to pass an asset to the scheme for consideration.
50
Why might someone want to make in specie contributions?
Because it can allow a member to contribute an asset to a pension scheme without the costs of liquidating it.
51
In what recent case did the FTT hold that a contribution made in specie by a member gave rise to personal tax relief?
Sippchoice Ltd v RCC [2018] UKFTT 122
52
What is a SIPP?
A self invested personal pension scheme, where the member, not the pension plan provider or trustee, determines the investment strategy.
53
What are the limits of employer contributions to occupational pension schemes?
There are no limits, but there are limits on the tax relief available to employers.
54
What kind of tax relief do employer contributions attract?
Relief as business expenses, provided that the contributions are made wholly and exclusively for the purposes of the employer's trade.
55
What is the limit on the tax relief that employers can claim in respect of their contributions to their employees' pension schemes?
Employers can claim relief on contributions of up to £500K in the year in which they are made. For excess amounts, there are rules requiring employers to spread the relief over several years.
56
What are asset backed contributions?
Arrangements which involve the employer using non-cash business assets to generate regular cash payments which are contributed to their pension schemes. They allow the employer to use their business assets to secure cash which is then paid to the pension scheme. It is a contractual funding arrangement under which an income stream is provided to a pension scheme, usually via a SPV. The income stream is given a NPV by the trustees and is treated as an asset, thereby reducing the scheme's deficit.
57
Why are ABC described as 'asset backed'?
Because an asset owned by the sponsoring employer will be transferred to a SPV in which the employer and the scheme will have specified interests (e.g. the ability to step in to realise the value of the underlying asset, up to the value of their claim).
58
Why are ABC arrangements attractive to employers?
(1) They can address pension scheme funding issues immediately without having to commit excess cash over relatively short periods. (2) It allows the employer to retain ownership and control of the asset. (3) The asset is usually returned to the employer at the end of the term of the ABC arrangement. (4) The pension scheme gets a steady profile of cash payments, e.g. as if the scheme owned bonds that pay coupons. (5) The pension scheme will have recourse to the asset if the sponsor becomes insolvent or defaults on a payment.
59
Why have the government tried to restrict tax relief for ABC?
Because of concerns that employers were receiving tax relief (1) when the initial contributions were paid to the scheme and (2) when an income stream deriving from an asset was received by the scheme.
60
How has the government tried to restrict tax relief for ABC?
By introducing statutory restrictions in FA 2012.
61
When was the most recent consultation on the future pf pensions tax relief?
2015
62
What was discussed at the 2015 Consultation?
Whether the EET system should change to a TEE system and.or whether there should be a single rate of relief for all taxpayers?
63
What is an EET system?
A system where pension contributions attract tax relief, investments within a pension wrapper attract relief, but where pension payments are taxed.
64
What payments is a RPS authorised to make?
(1) Authorised pension payments. (2) Authorised lump sum payments. (3) Death benefits (to member's surviving spouse, dependants etc.). (4) Recognised transfers (to other pension schemes). (5) Payments required under a pension sharing order on divorce or dissolution of a civil partnership. (6) Payments to members in connection with the administration of the scheme. (7) Payments to cover the provision of retirement financial advice from a regulated FA. (8) Payments to a scheme's sponsoring employer(s) (or someone connected with that person).
65
What is a scheme pension?
A pension: (1) payable to the member in at least annual instalments for life or until the end of a guaranteed period of up to 10 years; (2) payable at the same level each year or increasing annually; (3) starting no earlier than minimum pension age).
66
What is an authorised pension payment?
From a DB scheme, a scheme pension. From a DC scheme: (1) a scheme pension; (2) a lifetime annuity; (3) a drawdown pension.
67
What is an authorised pension payment from a money purchase or DC scheme?
(1) a scheme pension; (2) a lifetime annuity; (3) a drawdown pension.
68
Can a member draw some of their pension whilst they are still working, while continuing to accrue future benefits?
Yes.
69
What are AVCs?
Additional voluntary contributions. Employee's contributions to a pension scheme which are separate from or exceed the employer's contributions.
70
When can a member receive lump sum payments from a pension scheme?
When a member has a free-standing right to the payment of a lump-sum benefit OR because they've chosen to commute some or all of a pension benefit in favour of a lump sum.
71
What does 'commute' mean in a pensions context?
Giving up part or all of the pension payable from retirement in exchange for an immediate lump sum. In other words, taking a lump sum today in exchange for receiving a future income stream.
72
What are the main types of authorised lump-sum payments?
(1) Commuting a pension at retirement. (2) Paying lump sums from a money purchase arrangement. (3) Commuting for triviality. (4) Commuting for serious ill-health.
73
What is 'commuting a pension at retirement'?
This is where a member receives a lump sum of up to 25% of the capital value of their pension as a pension commencement lump sum, free from income tax.
74
What is the maximum pension commencement lump sum that a scheme can pay a member?
Broadly, 25% of the standard lifetime allowance. However, the rules vary depending on the member's entitlement under the scheme. The limit is the lower of 25% of the value of the member's uncrystallised pension rights and 25% of their available lifetime allowance. There must be sufficient lifetime allowance remaining to be able to receive the tax-free cash.
75
Prior to 2011/12, when could a member receive a pension commencement lump sum?
Between retirement (from 55 up to the age agreed under the scheme arrangements) up to 75. There was a prohibition on paying a PCLS to a member after he reached 75.
76
From 2011/12, when can a member receive a pension commencement lump sum?
Within six months before to 1 year after the date on which the member becomes entitled to the payment of a pension under the scheme arrangements.
77
What is a pension commencement lump sum?
A lump sum that may be paid to members of a RPS when they are entitled to start taking benefits from the scheme, usually from the date on which the member becomes entitled to payments under the scheme arrangements.
78
How much of the PCLS is tax free?
All of it, provided that it does not exceed the member's available lifetime allowance. Members with pre 6 April 2006 pension rights could be entitled to more than 25% of the standard lifetime allowance.
79
When is the window within which the PCLS must be paid from a money purchase arrangement extended?
For the 2014/15 tax year, temporarily.
80
Other than a PCLS, when can a member receive a lump sum from a pension scheme?
Where the scheme is a money purchase arrangement or DCS and has reached the min retirement pension age or meets the ill-healt condition. The member can, from 6 April 2015, withdraw funds as a cash lump sum in the form of an uncrystallised funds pension lump sum. Income tax is payable at the taxpayer's marginal rate.
81
What is an uncrystallised funds pension lump sum?
A form of cash withdrawal from a defined contribution pension scheme available from 6 April 2015 subject to tax at the member's marginal rate.
82
What is commuting for triviality?
Where a member commutes a small pension entitlement for a lump sum and: (1) the value of the member's entitlement from all RPS is less than £30K and they are over 60. 25% is tax free. (2) Scheme specific rules which allow an occupational or public service pension to commute small pots with value of up to £10K.
83
When can a member commute their pension benefits entirely before retirement?
Where the member has less than 12 months to live, the member can commute their pension benefits in exchange for a serious ill health lump sum.
84
What is a recognised transfer?
A transfer made from a RPS which represents a member's accrued pension rights to another pension scheme, which counts as an authorised payment. There may be difficulties when transferring to a qualifying recognised overseas pension scheme.
85
What is an unauthorised payment?
A payment by a RPS which does not meet the rules for paying pensions, lump sums or other authorised payments.
86
what are the two types of unauthorised payment?
(1) unauthorised member payments. | (2) unauthorised employer payments.
87
What is an unauthorised member payment?
A payment made by a RPS to or in respect of a person who is (or has been) a member of the scheme where the payment is not authorised by s.164 FA 2004. OR anything that is to be treated as an unauthorised payment which is paid to (or in respect of) a person who has been a member of the pension scheme.
88
What is an unauthorised employer payment?
A payment made by an occupational pension scheme to (or in respect of) a person who is or has been a sponsoring employer, where the payment is not authorised by s.175. or anything to be treated as such (value shifting).
89
what are pension liberation schemes?
Schemes which involve unauthorised payments being made to members.

UK Taxation (1 decks)

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