Pensions Chapter 30-31

Question 1

Is state pension taxed at source

Answer 1

no

Question 2

What is the % of the pension fund which can be taken tax free?

Answer 2

25%

Question 3

What is an annuity?

Answer 3

first 25% taken as tax free lump sum and then the rest used to purchase an ‘annuity’ which is guaranteed income for life

Question 4

What is a flexi access draw down?

Answer 4

Can take income out of the pension any time that they choose (more flexible than an annuity but doesn’t provide income for life)

Question 5

If an individual uses the pension fund like a bank account and takes cash as and when is needed…

Answer 5

for each amount taken out the first 25% is tax free

Question 6

what is the lifetime allowance?

Answer 6

1073100

Question 7

why are relevant earnings important?

Answer 7

that is the max amount that someone can get relief on pension contributions

Question 8

At what age are pension contributions no longer permitted?

Answer 8

75

Question 9

What is included in relevant income?

Answer 9

employment income
trading income
FHL
patent income in relation to inventions

Question 10

What are relief at source pensions?

Answer 10

Personal pensions
Occupational pensions can also be this (e.g NEST pensions), but for the exam should assume all occupational payments get relief under net pay arrangements.

Question 11

How is relief given for personal pensions?

Answer 11

Like giftaid

Question 12

with regards to relevant earnings what does this give us?

Answer 12

GROSS amount of personal pension (the amount they can actually pay is 80% of that).

Question 13

How are occupational pension contributions given relief?

Answer 13

Deducted from employment income

Question 14

Where the employer pays into the pension scheme of an employees family?

Answer 14

Taxable benefit subject to class 1 NICs

Question 15

Is there an NIC saving from net pay arrangements?

Answer 15

No, NICs are applied to gross pay

Question 16

What is the annual allowance?

Answer 16

40k

Question 17

How is the annual allowance used?

Answer 17

On a FIFO basis

Question 18

How long can the annual allowance be carried forward for?

Answer 18

3 tax years

Question 19

When is there no annual allowance to c/f?

Answer 19

If they werent part of a pension scheme in previous years

Question 20

How is the annual allowance tapered?

Answer 20

£1 for every £2 that ‘adjusted income’ is in excess of 240k

Question 21

What is the minimum annual allowance?

Answer 21

4k

Question 22

What is threshold income?

Answer 22

Net income less personal and occupational pension contributions

Question 23

What is adjusted income?

Answer 23

Net income plus EE occupational contributions (unless not already deducted these) and ER pension contributions. Also add pension input amount of a defined benefit scheme if relevant.

Question 24

What happens if an individual is in an arrangement to reduce or eliminate the effects of tapering provisions by reducing threshold/ adjusted income one yr and then increasing it the next?

Answer 24

Anti avoidance provision kicks in and allowance is calculated as if the arrangement doesnt exist.

Question 25

How is excess pension contributions over the allowance taxed?

Answer 25

As the top slice of income

Question 26

If tax charge due to breaching annual allowance is in excess of 2000?

Answer 26

individual can elect for charge to be paid from pension scheme by 31 july following the anniversary of the end of the tax year BUT THIS ONLY APPLIES TO THE BALANCE OF THE CHARGE IN EXCESS OF 40K EVEN IF THE ALLOWANCE IS TAPERED

Question 27

What is a lifetime allowance charge triggered by?

Answer 27

A benefit crystallisation event- e.g where payments are made from the fund

Question 28

What are the rates of lifetime allowance charges?

Answer 28

55% if it is taken as a lump sum
25% if it remains in the fund (will be taxed again at NSI rates when taken out)
-in practice the administrator deducts this amount and pays it over to HMRC

Question 29

At what amount of adjusted income is the allowance fully tapered to 40k?

Answer 29

312000

Question 30

What do many defined benefit pensions work to a target of?

Answer 30

providing a maximum pension benefit of 2/3rd of final remuneration for 40 years of service. In this case the accrual rate would be 1/60.

Question 31

What is the total pension input in a year for a defined benefit scheme?

Answer 31

Increase in value of individuals rights under the scheme

Question 32

How are individuals rights under a defined benefit scheme calculated?

Answer 32

Maximum annual pension entitlement x 16

Question 33

What is MPAA?

Answer 33

Basically an avoidance measure which prevents people paying into their money purchase scheme and then immediately withdrawing and getting 25% tax free. Only applies if individual drawing retirement benefits.

Question 34

How much is MPAA and can unused amounts be c/f?

Answer 34

4k and NO

Question 35

When some of the lifetime allowance has been used previously what do you need to be careful of?

Answer 35

if the lifetime allowance at that point was a different number then use the % of that used at the time to work out the % of the lifetime allowance left.

Question 36

What type of termination payment is included in relevant income?

Answer 36

Only the taxable bits!!

Question 37

Is the annual allowance charge ‘income’ for the purposes of working out the savings allowance?

Answer 37

NO

Question 38

Is a termination payment ‘income’ for the purposes of an ‘adjusted income’ calculation?

Answer 38

Yes