Pensions Chapter 30-31 Flashcards
Is state pension taxed at source
no
What is the % of the pension fund which can be taken tax free?
25%
What is an annuity?
first 25% taken as tax free lump sum and then the rest used to purchase an ‘annuity’ which is guaranteed income for life
What is a flexi access draw down?
Can take income out of the pension any time that they choose (more flexible than an annuity but doesn’t provide income for life)
If an individual uses the pension fund like a bank account and takes cash as and when is needed…
for each amount taken out the first 25% is tax free
what is the lifetime allowance?
1073100
why are relevant earnings important?
that is the max amount that someone can get relief on pension contributions
At what age are pension contributions no longer permitted?
75
What is included in relevant income?
employment income
trading income
FHL
patent income in relation to inventions
What are relief at source pensions?
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.
How is relief given for personal pensions?
Like giftaid
with regards to relevant earnings what does this give us?
GROSS amount of personal pension (the amount they can actually pay is 80% of that).
How are occupational pension contributions given relief?
Deducted from employment income
Where the employer pays into the pension scheme of an employees family?
Taxable benefit subject to class 1 NICs
Is there an NIC saving from net pay arrangements?
No, NICs are applied to gross pay
What is the annual allowance?
40k
How is the annual allowance used?
On a FIFO basis
How long can the annual allowance be carried forward for?
3 tax years
When is there no annual allowance to c/f?
If they werent part of a pension scheme in previous years
How is the annual allowance tapered?
£1 for every £2 that ‘adjusted income’ is in excess of 240k
What is the minimum annual allowance?
4k
What is threshold income?
Net income less personal and occupational pension contributions
What is adjusted income?
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.
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?
Anti avoidance provision kicks in and allowance is calculated as if the arrangement doesnt exist.
How is excess pension contributions over the allowance taxed?
As the top slice of income
If tax charge due to breaching annual allowance is in excess of 2000?
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
What is a lifetime allowance charge triggered by?
A benefit crystallisation event- e.g where payments are made from the fund
What are the rates of lifetime allowance charges?
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
At what amount of adjusted income is the allowance fully tapered to 40k?
312000
What do many defined benefit pensions work to a target of?
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.
What is the total pension input in a year for a defined benefit scheme?
Increase in value of individuals rights under the scheme
How are individuals rights under a defined benefit scheme calculated?
Maximum annual pension entitlement x 16
What is MPAA?
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.
How much is MPAA and can unused amounts be c/f?
4k and NO
When some of the lifetime allowance has been used previously what do you need to be careful of?
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.
What type of termination payment is included in relevant income?
Only the taxable bits!!
Is the annual allowance charge ‘income’ for the purposes of working out the savings allowance?
NO
Is a termination payment ‘income’ for the purposes of an ‘adjusted income’ calculation?
Yes
