Pensions

Question 1

What is a pension?

Answer 1

An amount saved by an individual for post-retirement age.

Question 2

Types of pension plans in the UK

Answer 2

1. State Pension Plan (managed by government)
2. Self-managed Pension Plan (individual-specific)

Question 3

State Pension Plan details

Answer 3

• Managed by government
• Funded through National Insurance Contributions (NIC)
• Basic pension plan

Question 4

Self-managed Pension Plan categories

Answer 4

1. Occupational Pension Plan
2. Personal Pension Plan

Question 5

Why does the government encourage self-managed pension plans?

Answer 5

To reduce burden on state pension plan

Question 6

describe
Occupational Pension Plan and
Personal Pension Plan

Answer 6

OPP: Maintained by employer for employees.
PPP: Operated with private fund managers.

Question 7

Tax relief for Occupational Pension Plan

Answer 7

1. Employee contributions: Allowed expense from employment income.
2. Employer contributions:
   
   • Exempt benefit for employee (no tax).
   • Allowed expense for employer (trading PNL).

Question 8

Tax relief for Personal Pension Plan

Answer 8

1. Individual:
   
   • 20% contribution from tax department.
   • Basic rate band extends by gross amount.
   • Adjusted net income reduces by gross amount.
2. Employer contributions:
   
   • Exempt benefit for employee.
   • Allowed expense for employer (trading PNL).

Question 9

What constitutes UK Relevant Earnings?

Answer 9

Employment income, trading income, or furnished holiday letting income.

Question 10

What is the condition for receiving pension contribution relief in the UK?

Answer 10

Pension contributions must be made through UK Relevant Earnings.

Question 11

What is the minimum UK Relevant Earnings amount for pension contribution purposes?

Answer 11

£3,600 (if actual earnings are less than £3,600).

Question 12

Is UK Relevant Earnings an issue for Occupational Pension Plans?

Answer 12

No, since contributions come from employment income, which is a UK Relevant Earning.

Question 13

Why may UK Relevant Earnings be an issue for Personal Pension Plans?

Answer 13

Contributions can come from non-UK Relevant Earnings.

Question 14

On which amount is tax relief given for Personal Pension Contributions?

Answer 14

The lower of gross Personal Pension Contribution or UK Relevant Earnings.

Question 15

What is the Annual Allowance for Pension Contribution?

Answer 15

Maximum pension contribution on which tax department gives tax relief (£40,000).
No tax relief available on excess contributions.

Question 16

Can unused Annual Allowance be carried forward?

Answer 16

Yes, up to 3 years.

Question 17

What contributions are included in the Annual Allowance limit?

Answer 17

ALL CONTRIBUTIONS
-Occupation pension plan: Employee/ Employer contributions.
-Personal Pension Plan: Individual/employer contributions

Question 18

How is tax relief calculated when there is excess contribution above the annual allowance?

Answer 18

For tax calculation purpose, relief is allowed on total contributions amount, however, excess contribution relief will be reversed by taxing excess contribution as a non saving income.

Question 19

What if the person is not part of a UK-registered pension plan.

Answer 19

No tax relief. Full income tax will be paid

Question 20

What is Tapering of Annual Allowance?

Answer 20

Reduction of Annual Allowance when adjusted income exceeds £240,000.
For every 2 £ access, 1£ will be deducted
Minimum annual allowance is 4000£.
Annual allowance will not diminish if threshold income is less than 200,000.

Adjusted income is:
-Net income + EE contribution in OPP + ER contributionin OPP/PPP (EE contribtuion in PPP is not included)

Threshold income is:
Net income
Less Gross PPC

Question 21

Extraction from pension plan minimum age

Answer 21

55 years

Question 22

Lifetime allowance limit of pension plan

Answer 22

1,073,100 pounds

Question 23

Tax implication if pension plan is of value 1,073,000 or below

Answer 23

-Lumpsum extraction of 25% of lower of:
1) Value of pension fund
2) 1,073,000
No tax on this lumpsum extraction

Remaining extraction from fund will be treated as non saving income in the year it is extracted

Question 24

Tax implication if pension plan value is above 1,073,000

Answer 24

ALONG with above implications, the excess value above lifetime limit following tax charge will arise:
-55% tax charge if extracted as lump sum
-25% tax charge if fund is left to finance future pension income. In this case, income tax will also arise in future when fund is extracted.