Pensions

Question 1

TAX RELIEF ON PENSION CONTRIBUTIONS

To get income tax relief on personal contributions, two criteria must be met:
1. The contributor must be a relevant UK individual AND
2. They must have relevant UK earnings
1.2 Relevant UK earnings include:
 employment income such as salary and bonus, or self-employment/partnership profits
 that arising from patent rights and treated as earned income
 general earnings from overseas Crown employment subject to UK tax
Note that any form of pension scheme income, or investment dividends of any kind, do not qualify as relevant earnings.

Answer 1

To be a relevant UK individual in the tax year in question, someone must be under age 75 and meet at least one of the following criteria:
1. have relevant UK earnings chargeable to income tax
2. be resident in the UK at some time during that year.
3. have been resident in the UK both:
 at some time during the five tax years immediately before the year in which the contribution was made. Relief in such circumstances is subject to a maximum of £3,600 per tax year, AND
 when they became a member of the pension scheme. OR
they or their spouse, have earnings for the tax year from an overseas Crown
employment subject to UK tax.

Question 2

2 methods of claiming pension tax relief?

Answer 2

Tax relief on individual contributions can be claimed in one of two ways:
1. relief at source OR
2. if the employee is in an employer’s occupational pension scheme (this would exclude group personal pension or group stakeholders where these are collected on
the relief at source basis) using the ‘net pay’ method.
With the relief at source method, contributions are paid net of basic rate tax. For example, if a policyholder wanted to make a gross contribution of £100 then the net contribution would be £80. The pension provider then reclaims the £20 (or 20%) basic rate tax relief from HMRC. If the policyholder is a higher or additional rate taxpayer, a further 20% or 25% tax relief may be claimed via self-assessment or, for an employed person, adjustment to their PAYE tax code.
Where the extra relief is claimed via self-assessment, the gross amount of the contribution is added to the employee’s basic rate tax band. This provides the additional tax relief by increasing the amount of income taxed at 20% (rather than 40%) or 40% (rather than 45% for the additional rate tax payer).

Question 3

USING PENSIONS TO REDUCE INCOME TAX?

Answer 3

To assess how to get tax relief using pensions, you will need to be familiar with some ‘HMRC’ speak; Adjusted Net Income (ANI). There are two occasions when ANI will be applied:
1. Those people who claim Child Benefit each year and have one person in the household who has an ANI in the tax year of more than £50,000, although it is unlikely that clients in later life will be affected by this.
2. Individuals with an ANI over £100,000 will lose some or even all their personal allowance:£1 is lost for every £2 of ANI over the £100,000 threshold, so the entire allowance is lost at £123,000 or more (Personal Allowance in 2017/18 is £11,500)

Question 4

So, what is ‘ANI’?

Answer 4

Adjusted net income is total grossed up income in the tax year from all sources (i.e. salary, interest, dividends etc.) less certain deductions, such as charity contributions or trading losses. One of the deductions is the gross value of a personally made pension contribution. In other words, pension contributions can reduce ANI and so may help restore the personal allowances for people discussed in the previous section.

Question 5

Pension input period?

Answer 5

every pension scheme has a pension input period, or PIP, that usually runs for 12 months. The pension input value accrued during the input period is compared to the annual allowance that applies to the tax year in which the PIP ends. Prior to the Summer Budget in 2015, it was possible to have a PIP that was not in line with the tax year (for example, 1 May 2014 to 30 April 2015) and there was also a facility to change the end date of a PIP. This provided some tax planning opportunities for those seeking to maximise their pension input, for example, in the run up to their retirement.

Question 6

Scheme pays?

Answer 6

If the annual allowance (excess) charge (AAC) exceeds £2,000, the member may have the right to elect for the scheme administrator to pay some or all the charge on their behalf – known as ‘scheme pays

Question 7

Annual allowance – the past?

Answer 7

The allowance was set at £215,000 a year when it was introduced in 2006. It rose to £255,000 by 2010/11 and then the rules were changed. For 2011/12 it was reduced to £50,000 per tax year, but with the facility to carry forward unused allowance from up to three earlier tax-years. The allowance was further reduced to £40,000 for 2014/15.

Question 8

Annual allowance – the present (2016/17)?

Answer 8

From 9 July 2015, all PIPs will run in line with the tax year and cannot be changed.
The Summer Budget also announced that from 6 April 2016 (and for subsequent tax years), the annual allowance will be tapered for individuals with a high income. There will be two separate tests carried out each tax year to determine whether tapering should take place that year. Both tests must be met before tapering applies –or the individual retains the annual allowance at £40,000 for that tax year. To carry out the two tests it is important to start with the first stage – identify the client’s net income for the tax year.
Net income; - this is defined as:
Gross income from all sources (excluding tax exempt income such as ISA income and VCT dividends)
LESS
Allowable deductions such as qualifying loan interest, professional membership fees, trading losses AND net pay contributions to an employer’s pension scheme. Note that pension premiums paid on a relief at source basis are NOT deducted.

Question 9

The Threshold Income Test?

Answer 9

3.16 The first test is the Threshold income test; the individual’s threshold income must be at least
£110,000 to meet the test.
Threshold income is:
Net income PLUS
The amount (if any) of salary that has been sacrificed for pension contributions – but ONLY for salary sacrifice arrangements that started on or after 9 July 2015.
LESS
The gross amount of any relief at source contributions paid by the individual in the tax year.
LESS
Any gross gift aid charity donations made by the individual in the tax year
If the threshold income text does not exceed £110,000, there is no need to carry out the adjusted income test and the annual allowance will not be tapered.

Question 10

The Adjusted Income Test?

Answer 10

Adjusted income test; the individual’s adjusted income must be at least £150,000 to meet
the test.
Adjusted income is: Net income
PLUS
Any gross net pay contributions (these will be the gross net pay contributions that were deducted to get to net income. Adding these back in here means they have had no effect at all on adjusted income so far)
PLUS
‘Employer’ input value such as money purchase premiums paid into the member’s policy in the tax year, or the input value of a defined benefit net of the employee net pay contributions. For example, if the defined benefit input value for the year was £38,500 but the member had put in net pay contributions of £2,500, the Employer input value for adjusted income purposes would be £36,000 (£38,500 less the £2,500). The total of Net Pay contributions AND Employer input value = the TOTAL Defined Benefit Pension Input Amount (DB PIA).

Question 11

The events that will trigger the MPAA rules are?

Answer 11

Takes an income withdrawal from a flexi-access drawdown fund (including in the form of a short-term annuity).
 Takes an uncrystallised funds pension lump sum (UFPLS).
 Notifies the scheme administrator of their intention to convert a pre-6 April 2015 capped
drawdown fund to a flexi-access drawdown fund and then subsequently takes an income
withdrawal from that fund (including in the form of a short-term annuity).
 Takes more than the permitted maximum for capped drawdown from a pre-6 April 2015
drawdown pension fund.
 Receives a stand-alone lump sum when entitled to primary protection where the lump sum
protection exceeds £375,000.
 Receives a payment from a lifetime annuity where the annual rate of payment can be
decreased in other than permitted circumstances (i.e. payment is received from a flexible annuity contract as introduced by the Taxation of Pensions Act 2014).

Question 12

Events that do NOT trigger MPAA rules?

Answer 12

These are where the member:
 Receives a pension commencement lump sum.
 Receives a trivial commutation lump sum.
 Receives a small pots lump sum.
 Receives a payment from a scheme pension from a defined benefit arrangement.
 Receives a payment from a scheme pension paid directly from the funds of a money
purchase arrangement where at least 12 people (including dependants) are receiving a
scheme pension paid directly from scheme funds.
 Receives a scheme pension secured by way of an annuity from a money purchase scheme
of any size.
 Is in receipt of a lifetime annuity where payments cannot go down except in prescribed
circumstances (conventional lifetime annuity).

Question 13

THE LIFETIME ALLOWANCE (LTA)?

Answer 13

The LTA is the aggregate limit that applies to all pension savings, including benefits built up prior to 6 April 2006 (A-Day). It limits the amount of savings that can be built up in a tax- advantaged environment. When the LTA was introduced on 6 April 2006, it was set at £1.5 million and it increased in subsequent tax years up to 2011/12 when it reached £1.8 million. Thereafter, it fell as follows:
 £1.5 million in 2012/13 and 2013/14;
 £1.25 million in 2014/15 and 2015/16;
 £1 million 2016/17 and 2017/18, and is intended to increase by CPI from April 2018 onwards.

Question 14

Higher LTA?

Answer 14

In certain circumstances, individuals may be entitled to a higher LTA:
 if they are not UK residents;
 if they have transferred benefits in from recognised overseas pension schemes;
 if they have an entitlement to benefits arising from a pension credit in respect of a sharing order following divorce, effected before 6 April 2006; or
 if they have an entitlement to a pension credit in respect of a sharing order following divorce. The order was acquired on or after 6 April 2006 and was derived from a pension that started on or after 6 April 2006 and was already in payment to the original member at the time of the sharing order

Question 15

Higher LTA part2?

Answer 15

if they have benefits in respect of a pre-A-Day pension scheme and they have
registered for enhanced or primary transitional LTA protection;
 if they have registered for fixed protection 2012 as a result of the reduction of the LTA from £1.8 million to £1.5 million on 6 April 2012; or
 if they have registered for fixed protection 2014 or individual protection 2014 as a result of the reduction of the LTA from £1.5 million to £1.25 million on 6 April 2014.
 if they have registered for fixed protection 2016 or individual protection 2016 as a result of the reduction of the LTA from £1.25 million to £1 million on 6 April 2016

Question 16

Ill health &a pension payments?

Answer 16

2.2
The member may take their benefits early on the grounds of ill-health where:
 the scheme administrator receives medical evidence from a recognized medical practitioner that the member is, and will continue to be, medically incapable of continuing his or her current occupation as a result of injury, sickness, disease or disability; and
 as a result of the ill-health the member has ceased that occupation.
You should note that these are the HMRC requirements; in practice the scheme rules may have stricter ill-health criteria. For example, they may state the member must be incapable of carrying out any occupation rather than just the current/normal occupation they are in.
This definition within the scheme rules can have a dramatic effect on the options available for those in ill-health.
2.3 The Taxation of Pensions Act 2014 has not changed when a pension income can be accessed via the ill-health condition. However, it has increased the options available to a member in these circumstances. The usual options of a scheme pension, a lifetime annuity or a drawdown pension remain available, but from 6 April 2015 a member who satisfies the ill-health conditions can access their benefits at any age as a:
 trivial commutation lump sum payment (if the conditions are satisfied).
 small pots payment (if the conditions are satisfied).
 an uncrystallised funds pension lump sum (UFPLS) (in respect of a money purchase scheme).
If a trivial commutation lump sum payment or a small pots payment is made the benefits will not be tested against the member’s LTA. In all other cases, the amount crystallised will be tested against the member’s full LTA (as it would be for members who have reached NMPA).

Question 17

Small pots payments?

Answer 17

Small pots payments are defined as those valued at £10,000 or less. From6 April 2015, the maximum number of small pots payments that a member can take from non-occupational pension schemes (which normall means personal pension schemes) is three.
There is no limit on the number of small pots payments that a member can take from unconnected occupational pension schemes.
In order to take a small pots payment the member must have reached minimum pension age of 55 or their protected pension age or satisfy the ill-health conditions.
Small pots payments are not tested against the member’s LTA as they are not treated as BCEs.
The payment of a small pots payment does not trigger the MPAA.
3.8 Small pots taxation is:
 25% of the payment received will be tax free for uncrystallised funds, the remainder taxed as the member’s pension income under PAYE.
 The entire payment will be taxed as the member’s pension income under PAYE if a small pots payment is made in respect of crystallised benefits.

Question 18

Trivial commutation lump sum?

Answer 18

If an individual has benefits held in a defined benefit scheme and the value of their total pension benefits (across all arrangements) does not exceed the commutation limit of £30,000, the benefits from the defined benefit scheme may be paid as a cash lump sum rather than as income. This is known as a trivial commutation lump sum.
The main rules that apply to trivial commutation lump sums from 6 April 2015 are as follows:
 Only a defined benefit scheme pension can be commuted;
 The value on the nominated date (the date on which all the member’s pensions are valued) of ALL pension rights (whether pre A-Day, uncrystallised or crystallised, but excluding small pots that have already been taken) must not exceed £30,000;
 The member must have reached the minimum pension age or they must have reached their protected pension age or meet the ill health conditions;
 The member must have available lifetime allowance;
 The lump sum payment must extinguish the member’s entitlement to defined benefits
under the registered pension scheme that is making the payment.
If the member does not start to commute their benefits within three months of the nominated date they can choose another nominated date and start the process again.

Question 19

Primary protection.How does it work?

Answer 19

1.4 Primary protection may be used by individuals who had aggregate pension savings (including benefits already in payment) of over £1.5 million as at 5 April 2006.
If an individual had already taken all of their pension benefits prior to 6 April 2006, transitional protection is not required. The way in which the pension savings are valued depends upon the type of scheme involved, for example:
 for a money purchase scheme where benefits were not yet being drawn, the value of the fund on A Day was used;
 for a defined benefits scheme where benefits were not yet being drawn, the pension benefits were valued using a valuation factor of 20:1. The pension was calculated as if the individual was of retirement age and had taken retirement benefits on 5 April 2006 (with no early retirement factor). If a pension commencement lump sum (PCLS) was provided in addition to the pension, the pension provided by the scheme was multiplied by 20 and the PCLS added at its face value.
1.5 Any benefits already in payment on 5 April 2006 are valued using a valuation factor of 25:1 to reflect the fact that it is likely that a PCLS was probably taken at outset.
Under primary protection, the individual’s pension rights are protected by giving the individual a higher personal LTA. This is to reflect the fact that the value of their benefits exceeded £1.5 million at A-Day.
1.6 The first stage in the calculation is to work out a factor, known as the primary protection factor, which is effectively the percentage by which the benefits at A-Day exceeded the LTA of £1.5 million that was in force on 6 April 2006. The answer is rounded up to 2 decimal places.
The primary protection factor is calculated according to the following formula:
1.7 Prior to 6 April 2012 the primary protection factor was applied to the standard LTA that was in force at the time benefits are crystallised. The resulting figure was then added to the LTA to give the individual’s personal LTA.
However, on 6 April 2012 the LTA was reduced to £1.5 million and has since been reduced again to £1.25 million and is now £1 million.. It would be unfair to apply the primary protection factor to a lower value from 2012/13 onwards as this would result in the level of protection being reduced after 6 April 2012. Therefore, the primary protection factor is always applied to a figure of £1.8 million, which is known as the underpinned LTA. This underpinned LTA of £1.8 million will continue to be used until such a time that the standard LTA increases to above £1.8 million.