Practice Test 6 - John & Sue

Question 1

State the additional information that you would require to prepare a full review of Jon and Sue’s existing pension arrangements.

Answer 1

• Income/pension commencement lump sums (PCLS) required.
• Current Contributions/contributions history/available Annual Allowance/Jon’s earnings from company/ Affordability.
• SIPP investments/asset allocation/SIPP statement.
• Charges/exit penalties.
• BR19.
• Nomination of Beneficiary on SIPP/trust.
• Death Benefits/Spouse’s pension.
• Escalation under final salary scheme.
• Lifetime allowance (LTA) percentage used by final salary scheme/LTA remaining/has Jon previously applied for Protection?
• Solvency of the Occupational Pension Scheme (OPS).
• Previous pension/retained benefits.
• Inheritances/use of other assets/sale of business/exit strategy/downsizing/ work beyond 2015.
• Ethical preferences.
• Capacity for loss.

Question 2

Following the reduction in the lifetime allowance over recent years, explain briefly to Jon how this may affect his pension plans.

Answer 2

• Any benefits taken in excess of Lifetime Allowance;
• 55% tax charge on Lump Sum.
• 25% on income.

Question 3

Recommend what action Jon could take to mitigate any impact on his pension plans from these changes to the lifetime allowance. No calculation is required.

Answer 3

• Obtain value as at 5 April 2016.
• If above/they are above £1,000,000.
• He can apply for Individual Protection (2016).
• There is no deadline for him to apply.
• His Allowance will be between £1,000,000 and £1,250,000.
• He can continue to make future pension contributions.

General ways to mitigate tax charge:
• He can cease contributions/he can contribute for Sue/make use of other investments/crystallise benefits/switch to lower growth investments/cash or fixed-interest (to remain below lifetime allowance (LTA) until crystallisation).

Question 4

Jon would like more details on Venture Capital Trusts.

Explain the main tax advantages for Jon of investing in a Venture Capital Trust.

Answer 4

• Income Tax Relief/Tax Reducer.
• Income Tax rebate of 30%.
• He can eliminate his income tax bill/relief is restricted to income tax paid.
• Higher contribution levels/up to £200,000.
• Tax relief given immediately/quickly.
• No further liability to Income Tax on any Dividends paid.
• Income tax relief remains if a disposal/transfer to spouse takes place/or on death.
• Capital Gains Tax (CGT) relief;
• on sale/gains crystallised.
• No minimum holding period for CGT.

Question 5

State five drawbacks for Jon of investing in a Venture Capital Trust.

Answer 5

• Illiquid.
• No guarantee of capital growth/dividends/company could fail/a loss may occur.
• VCT approval may be withdrawn.
• High-risk.
• Jon is a medium-risk investor/does not match his ATR.
• Must hold for 5 years (to retain Income Tax relief).

Question 6

Summarise the options available for Sue with regard to her State Pension benefits when she reaches her State Pension Age in 2018.

Answer 6

• Take benefits.
• Defer.
• Increased benefits available.
• 5.8% uplift each year/1% for every nine weeks.
• No lump sum option.

Question 7

Sue is able to purchase additional entitlement to the Basic State Pension through voluntary National Insurance contributions.

Explain briefly to Sue the benefits of purchasing additional State Pension entitlement using this method.

Answer 7

• Guaranteed benefits.
• Matches her ATR.
• Value for money.
• Will increase each year in payment.
• Triple Lock Guarantee – increase each year by higher of.
• Retail prices index (RPI).
• Average Earnings.
• 2.5%.

Question 8

Sue wishes to purchase a new car.
Explain in detail to Jon and Sue how they could obtain a tax-efficient lump sum from their investment bond to purchase a new car.

Answer 8

• Take 5% tax deferred withdrawals;
• of original investment amount;
• these are cumulative.
• Sue is a Basic Rate Taxpayer.
• Jon is a Higher Rate Taxpayer.
• Assign Bond/segments to Sue.
• Encash bond/segments in Sue’s name.
• So provided encashments do not push Sue into higher rates of Income Tax;
• there will be no further Income Tax.
• Sue can use top-slicing relief.

Question 9

Sue wishes to purchase a new car.
List the additional information you would require to enable you to calculate the most tax-efficient method of drawing funds from the Investment Bond. No calculation is required.

Answer 9

• Cost of new car/date of purchase.
• Date of original investment.
• Original investment amount.
• Withdrawals made.
• Details of any additional investment.
• Segmented/number of segments.
• Market value adjuster (MVA)/Exit Penalty.
• Any Guaranteed Bonus Rate/guaranteed return on Bond.
• Sue Taxable Income in current tax year.

Question 10

Recommend and justify what actions Jon and Sue could take to generate a tax-efficient income in retirement from their investment portfolio.

Answer 10

• Use ISA/cash ISA/tax free NS&I.
• Tax free.
• Transfer Fixed-Interest Collective funds in ISA’s.
• Interest paid on Fixed-Interest investments is tax-free within an ISA.
• Use Capital Gains Tax (CGT) exemptions.
• Crystallise losses/Register any CGT Losses with HMRC.
• To set against capital gains.
• Transfer Joint Assets into Sue’s name.
• She is a Basic Rate Taxpayer;
• so this will save Tax at 10%/20%/25%.
• Take 5% withdrawals from Investment Bond.
• Tax-deferred/no immediate liability.
• Take bond withdrawals in Sue’s name using her available basic rate band.
• Make pension contribution.
• Take pension commencement lump sums (PCLS)/tax relief.