PT30 Pension Schemes Flashcards
Main two ways of providing funds for retirement
- personal pension schemes and
- occupational pension schemes
Registered pension funds do not pay…
income tax or capital gains tax and so grow tax free
Drawing down on a pension implications…
If an individual draws from the pension fund, 25% of the amount drawn is tax free (subject to lifetime allowance). The rest is taxable on non savings income.
Maximum GROSS contribution qualifying for tax relief that a taxpayer can pay into a pension scheme….
the higher of:
- 100% of their relevant earnings for the tax year
- £3,600
Relevant earnings include….
employment income, trading income and income from furnished holiday lets
How is relief given on amounts contributed to a personal pension scheme?
At source.
Basic rate relief is given at source by the taxpayer only paying 80% of the contribution.
Higher and additional rate relief is given by extending the basic and higher rate limits by the GROSS contribution.
How is relief given on occupational pension schemes?
Generally by ‘net pay arrangements’ whereby PAYE (but not NICs) is applied to salary after the pension contribution has been deducted.
What happens if an employer contributes to an employee’s pension scheme?
It’s a tax free benefit, but it must be considered when looking at whether the annual allowance has been exceeded.
The annual allowance for 2022/23….
£40,000
Increased by any unused annual allowance from the previous three years
Current annual allowance used in priority then FIFO.
Tapered for high income individuals
When is the annual allowance tapered?
Where threshold income exceeds £200,000 and adjusted income exceeds £240,000.
The annual allowance is reduced by £1 for every £2 of adjusted income in excess of £240,000 but cannot be reduced below £40,000.
What is the minimum annual allowance (if it has been tapered)?
£4,000
Threshold income is….
generally net income less the gross amount of personal pension contributions
Adjusted income is….
Net income plus occupational pension contributions plus employer contributions
How is pension input in excess of the annual allowance charged?
At the individual’s marginal rate of tax
Lifetime allowance for 2022/23?
£1,073,100.
What happens if you exceed the lifetime allowance?
The excess is charged to tax. The rate is 55% if the individual takes the excess as a lump sum or 25% if the individual leaves the excess in the fund and draws it later as pension income.
How do you calculate total pension input for defined contribution schemes
Total contributions eligible for tax relief + employer contributions
How do you calculate total pension input for defined Benefit (or ‘final salary’) schemes
The Increase in value of individual’s rights under the scheme
Value of rights is calculated as Maximum annual pension entitlement x 16
(so you have to do at beginning and end of year to figure out increase)
How do we calculate the maximum annual entitlement to work out the value of rights?
OK so basically the longer you’ve worked the higher the percentage of your final salary you’re entitled to. You’ll be given an accrual rate, like 1/60th. This means for each year you’ve worked, you’re entitled to 1/60th of your final salary.
Therefore if at the beginning of the year you’ve worked 10/60ths at the end of the year you’ll have worked 11/60ths and you’ll have two different salaries to work with.
You’ll then multiply that by 16 to get the value of rights
Step by step guide for defined benefit schemes
- Work out the maximum annual entitlement using your accrual rates & salary
- Multiply that by 16 to get your value of rights
- See how much the value of rights has increased by (by repeating process for beginning of year)
- See if the increase is greater than your annual allowance (remember your AA could be tapered)
Lifetime Allowance
