Pensions

Question 1

Occupational pension scheme definition

Answer 1

A pension scheme run by an employer or group of employers for employees

• Earnings related (defined benefit)
• Investment related (defined contribution)

(this is the type that auto-enrolment is)

Question 2

Personal pension scheme definition

Answer 2

A pension scheme run by a financial institution such as an insurance company or a bank

Question 3

Multiple pension schemes

Answer 3

Rules apply to all the pension schemes joined, not each scheme separately

Question 4

Taxation of pension schemes

Answer 4

not liable to tax on income or gains. Therefore tax-efficient

Question 5

Who can make contributions attracting tax relief?

Answer 5

any individual who is an active member of a pension scheme registered with HMRC under the age of 75

Question 6

Annual limit for relief

Answer 6

Max amount of contributions HIGHER of:

• relevant earnings chargeable to income tax
• £3,600

Question 7

Tax relief given at source

Answer 7

Relief is given at source by the contributions being deemed to be made net of basic rate tax in same way as gift aid - so pension co claims extra amount from HMRC

If higher rate payer basic rate band is raised by grossed up amount etc.

Question 8

Net pay arrangement

Answer 8

Occupational schemes will usually have net pay arrangement

gross pension contributions deducted before PAYE

assume this is the case for exam purpose

Question 9

Contributions by employer

Answer 9

exempt benefits for the employee. No limit but do count towards annual allowance.

Question 10

Annual allowance

Answer 10

The overriding limit for total pension input to the active member’s pension fund for each tax year

£40,000 per annum

If pension contributions (both employer and employee) exceed this, there is a charge that claws back the excess tax relief given on the contributions

Won’t be tested numerically. Awareness only.

Question 11

Drawing a pension

Answer 11

Individuals can take a tax free lump sum ( minimum age 55) usually up to 25% of their pension fund

Now able to draw pensions however they wish
- draw whole amount as lump sum
draw tax free amount as lump sum then buy annuity
- buying a flexible income drawdown product
- leaving the funds in the pension scheme and withdrawing cash when required

Question 12

Lifetime allowance

Answer 12

Awareness only. If pension fund in excess additional tax consequences.