Pensions Flashcards
What is a pension?
An amount saved by an individual for post-retirement age.
Types of pension plans in the UK
- State Pension Plan (managed by government)
- Self-managed Pension Plan (individual-specific)
State Pension Plan details
- Managed by government
- Funded through National Insurance Contributions (NIC)
- Basic pension plan
Self-managed Pension Plan categories
- Occupational Pension Plan
- Personal Pension Plan
Why does the government encourage self-managed pension plans?
To reduce burden on state pension plan
describe
Occupational Pension Plan and
Personal Pension Plan
OPP: Maintained by employer for employees.
PPP: Operated with private fund managers.
Tax relief for Occupational Pension Plan
- Employee contributions: Allowed expense from employment income.
- Employer contributions:
- Exempt benefit for employee (no tax).
- Allowed expense for employer (trading PNL).
Tax relief for Personal Pension Plan
- Individual:
- 20% contribution from tax department.
- Basic rate band extends by gross amount.
- Adjusted net income reduces by gross amount.
- Employer contributions:
- Exempt benefit for employee.
- Allowed expense for employer (trading PNL).
What constitutes UK Relevant Earnings?
Employment income, trading income, or furnished holiday letting income.
What is the condition for receiving pension contribution relief in the UK?
Pension contributions must be made through UK Relevant Earnings.
What is the minimum UK Relevant Earnings amount for pension contribution purposes?
£3,600 (if actual earnings are less than £3,600).
Is UK Relevant Earnings an issue for Occupational Pension Plans?
No, since contributions come from employment income, which is a UK Relevant Earning.
Why may UK Relevant Earnings be an issue for Personal Pension Plans?
Contributions can come from non-UK Relevant Earnings.
On which amount is tax relief given for Personal Pension Contributions?
The lower of gross Personal Pension Contribution or UK Relevant Earnings.
What is the Annual Allowance for Pension Contribution?
Maximum pension contribution on which tax department gives tax relief (£40,000).
No tax relief available on excess contributions.
Can unused Annual Allowance be carried forward?
Yes, up to 3 years.
What contributions are included in the Annual Allowance limit?
ALL CONTRIBUTIONS
-Occupation pension plan: Employee/ Employer contributions.
-Personal Pension Plan: Individual/employer contributions
How is tax relief calculated when there is excess contribution above the annual allowance?
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.
What if the person is not part of a UK-registered pension plan.
No tax relief. Full income tax will be paid
What is Tapering of Annual Allowance?
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
Extraction from pension plan minimum age
55 years
Lifetime allowance limit of pension plan
1,073,100 pounds
Tax implication if pension plan is of value 1,073,000 or below
-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
Tax implication if pension plan value is above 1,073,000
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.
registration of pension plan conditions
early extraction from plan not allowed
fund must not invest in residential property and personal chattels
tax releifs only available if fund is registered
