R04 Study Flashcards
Tax Relief for personal pension
Relief at source- conts paid net of BR tax, additional relief through SA.
Tax relief for Occupational schemes
Net pay system - gross cont deducted from gross pay. Member taxed on resultant amount.
No reduction in NI liability.
Threshold and Adjusted income for tapered annual allowance purposes
Threshold income = £200k. Determines whether adjusted income needs to be calculated.
Adjusted income = £240k. Determined the amount of reduction in annual allowance. Reduction is £1 for every £2 above £240k.
Min allowance = £4k which would apply is adjusted income higher than £312k.
Note - adjusted income includes other forms of income such as pensions in payment, not just earned income.
SIPP loans
50% of net assets (value of assets less existing loans)
Cannot be used for loans to an employer
SSAS loans
- can lend 50% of net assets,
- must be secured as a 1st charge on assets,
- must charge an interest rate at least 1% higher than average base rate of main clearing banks
- must not exceed 5 yr term but can roll over further 5 yrs
- all members must be in agreement
- must be repaid in equal instalments at least annually
Self-investment - investment in sponsoring employer
SIPP = 100%
SSAS = no more than 5%, max 20% where more than one sponsoring employer
Recycled lump sum rules
- lump sum taken in previous 12 months plus current lump sum >£7,500
- cumulative amount of additional conts >30% of cash sum taken in 2 tax years before or after receipt of cash sum
- additional conts >30% of normal pattern of conts.
- recycling was pre-planned
Divorce - pension offsetting
Assets of similar value are given in place of a share of the pension.
Divorce - pension earmarking
Court order compels scheme to pay a % of pension to ex-spouse. Can only be paid when original member takes their pension. Pension taxable at members marginal rate. May not provide death benefits if member dies. May cease on remarriage of ex-spouse.
Divorce - pension sharing
Court order compels scheme to transfer part of fund to ex-spouse. Does not count towards annual allowance of receiving party.
VCT/EIS/SEIS Tax Relief
VCT = 30%, 5 yrs
EIS = 30%, 3 yrs
SEIS = 50%, 3 yrs
Tax relief clawed back if sold within years above.
Serious Ill health lump sum
Paid if life expectancy <12 months. Tax free before age 75. After 75 tax is based on marginal rate.
Can be taken even if past minimum pension age but Applies to uncrystallised funds only which must be taken in full.
Each arrangement dealt with separately. Don’t have to take all arrangements.
BCE, anything over LTA taxed at 55%.
Annuity beneficiary payment tax treatment
Age of member not recipient that is significant.
Tax free if member was under 75 at death (& notified within 2 years). Taxable if over 75.
Calculate crystallisation required to provide a set amount of income
Example
Net income required is £20k. Higher rate tax payer.
Lifetime annuity. Annuity rate given eg £65 per £1000.
- 1000 crystallised = 250 Tfc + 750 for annuity purchase.
- 65 per £1000 = 0.065
- 0.065 x 750 purchase price = 48.75 gross income reduced by 40% tax = 29.25 income per 1000 crystallised
- total income is £29.25 + £250 tfc = 279.25
- target income (20k) divided by 279.25 x 1000 = 71,620
FAD / UFPLS
* 1000 crystallised = 250 tfc + 750 taxable.
* tax of 750 x 40% applies = 700 net income
* 20k divided by 700 x 1000 = 28571
Capped drawdown
GAD rate eg £65 per £1000.
* 1000 crystallised = 250 Tfc + 750 to produce income.
* 65/1000 x 750 = 48.75
* GAD max = 150% x 48.75 = 73.12
* reduced by 40% tax to 43.87
* income = 43.87 + 250 tfc = 293.87
* 20000 / 293.87 x 1000 = 68,057
Beneficiary/nominee annuity guarantees
There can be no guarantee and no joint life on a dependants/nominees lifetime annuity.
Dependants / beneficiary FAD contributions
It is not possible to contribute to or transfer uncrystallised funds into the FAD.
They can nominate a successor to receive remaining fund on their death.
If a member dies with no nomination in place only dependents can gain all the death benefit options. A non-dependent can only receive a cash lump sum.
Charitable donation from FAD
Example: J & A were married at the time of Js death. A designated the uncrystallised fund as a FAD. J had no children but A had one child under 23.
On As death a charitable lump sum can be made because J had no dependents, even though A does.
If J had a dependent then a charitable lump sum would not have been available.
Exceeding LTA charges
55% for lump sum, 25% for income
How to calculate the money amount being crystallised from a DB pension for LTA purposes
Multiply the pension, before PCLS, by 20
In what circumstances could LTA be a reduced amount?
1) member is receiving a pension that started before 6 April 2006
Pre A-Day pension reduce LTA. The reduction is made at the first crystallisation event after A Day. The calculation = pension in payment x 25.
2) the member had a protected pension age on 6 April 2006.
LTA reduction = 2.5% for each complete year between taking benefits and age 55.
This also impacts max PCLS as this is always the lower of 25% amount being crystallised and 25% of members available LTA.
BCE Events
1) taking benefits (PCLS, UFPLS, FAD, lifetime annuity)
2) serious ill health lump sum payment
3) reaching 75 with uncrystallised funds or FAD
4) on death of member either by paying Death in service benefit and nominated person taking cash, designating uncrystallised benefits taken as cash, designating as FAD or buying dependent/nominee annuity
No further BCE after age 75.
Primary protection
Latest date to apply 5 April 2009
Value of fund >£1.5m at A-day. Can still contribute. Can only be reduced due to pension sharing order.
Lifetime allowance enhancement factor (LAEF) was granted = Value of fund minus @ Aday 1.5m / 1.5m
Underpin of 1.8m
Personal LTA = (1.8m x LAEF)+1.8m
Cash protection = protected cash sum x 20%
Enhanced Protection
Latest date to apply 5 April 2009
Member will never be subject to a LTA charge but it enhanced protection is lost if there is any pension input.
Cash protection = % of cash to fund at Aday.
Fixed protection
FP12 = LTA of 1.8m. Latest date to apply 5 April 2013.
FP14 = LTA of 1.5m. Latest date to apply 5 April 2014.
FP16 = LTA of 1.25m. Still open to applications but can’t have been any input after 6 April 2016. No min fund value.
In all cases lost if any pension input.
Individual Protection
IP14 - latest date to apply 5 April 2017. LTA = total of pension rights at 5 April 2014, capped at 1.5m.
IP16 - still open to applications at BCE. LTA = total of pension rights at 5 April 2016, capped at 1.25m.
Can have further pension inputs with both.
Auto enrolment
Eligible jobholders
Must be auto enrolled
Age 22 - SPA
Work in UK
Earn £10k+
Auto enrolment
Non-Eligible jobholders
Don’t need to be auto enrolled but have a right to opt in. If they do employer must pay min. Contributions.
Aged 16-21 or between SPA - 74
Earn £10k+
OR
Aged 16-74
Earn £6240 - £10k
Auto enrolment
Entitled worker
Has a right to join but employer does not have to make a contribution.
Aged 16-74
Earns less than £6240
Contracted out schemes
If a scheme contacted out of SERPS both employer and employee paid lower NICs. Scheme had to offer a GMP.
GMP abolished 97/98 tax year.
Contracting out abolished 2015/16.
DB scheme pension input amount
Benefit at start of year increased by CPI x 16
Eg. Pension @ end year was 21/60 x 36k = 12600 x 16 = 201600.
Pension @ start year was 20/60 x 30k = 10k. Increased by 2% CPI = 10200 x 16 = 163200
PIA = 201600 - 163200 = £38,400.
State sector DB scheme PIA
Pension x 16 + PCLS
Scheme pension guarantee period
Max. 10 years
May incorporate pension protection (pension x 20 minus gross payments already paid)
Commutation calculation for PCLS from a scheme pension
Pension before commutation x commutation factor
Divided by
1 + (0.15 x commutation factor)
The pension is then reduced by the PCLS figure calculated/commutation factor.
DB scheme pension escalation
Benefits accrued from April 1997 - 6 April 2005 = CPI to a max 5%
Benefits accrued after 6 April 2005 = CPI to a max 2.5%
Benefits accrued before April 1997 and contracted in = nil
Benefits accrued before April 1997 and contracted out = GMP. No increase on pre 1988 benefits as state provides CPI protection for post 1998 benefits scheme pays first 3%, state pays balance if CPI exceeds this.
The Pension’s Regulator (TPR)
Protects workplace pensions
Controls the pension protection scheme
If they conclude a company is insufficiently resourced they can issue a financial support direction.
DB early leavers
<2yrs membership = refund of contributions less 20% tax on first £20k, 50% on excess.
> 2yrs = deferred pension revalued between date of leaving at date of taking benefits.
Annual allowance tax charge
Subject to marginal rate of tax.
Value of pre A-Day pensions for LTA
At first BCE after A-Day multiply the level of income by 25.
Scheme wind up timescales
TPR expects the key activities involved in winding up a scheme to be complete within 18 months (2 years in exceptional circumstances).
Short service refund taxation
First £20k refunded taxed at 20%
Anything over £20k taxed at 50%
Bereavement payments
Higher amount for those eligible for child benefit. Max of £3,500 lump sum plus £350 per month for 18 months (£6,300)
Deferred state pension increases
1% for each full 9 weeks deferred. No lump sum payment permitted.
Calculating capped drawdown fund value for LTA purposes
(Income now x 25) x 80%
Impact of mortality drag
Drawdown funds suffer from mortality drag, the longer this is left the worse it becomes.
Link between annuity and gilt rates
A fall in gilt rates will have a negative impact on income for future annuitants.
Current State pension
Retiring after April 2016 - single tier state pension
If contracted in you may have entitlements to a protected amount
Calculating the benefit from a DB scheme
(Years service / accrual rate) x final salary
MPAA and DB schemes
The MPAA does not apply to DB contributions. The standard AA will apply.
QROPs withdrawal limits
Where an individual takes benefits from a QROPs during their period of non-residence the pension is only taxed in the UK upon the member’s return if the relevant withdrawals taken during that time are >£100,000
TPR time limits
When a scheme is not meeting it’s SFO the trustees must by law develop a recovery plan within 12 weeks and submit this to TPR within 15 months.
Maximum plan charges
Stakeholder: 1.5% for first 10 years, 1% thereafter.
Occupational: default fund charge can’t exceed 0.75%.
Segmented pension income
To calculate how many segments must be used to calculate required net income:
Value of plan / no. Segments
For each segments you receive 25% TFC
Plus the balance x annuity rate x 60% or 80% (depends on tax bracket - 60% retained for higher and 80% retained for basic).
TFC + net income = net received per segment.
Amount required divided by net received = no. Segments to be encashed
State Graduated Pension Scheme
Operated between 1961 - 1975 for employees who paid NICs.
SERPS
Operated between 1978 - 2002 and was replaced by S2P.
NEST
Charges are 0.3%pa plus 1.8% on contributions.
Possible to transfer in with no charge.
Sharia compliant
Recommended fund is a retirement date fund
Pension term assurance
From April 2006 pta could be set up with full tax relief on contributions. Following a review in Dec 2006 employee contributions can no longer receive tax relief but employer contributions still do.
Independent Governance Committee role
Main role is to ensure members of workplace schemes are receiving value for money.
Other duties are publishing an annual report and raising concerns at board level.
Must have a min of 5 members.
De-registration of a pension scheme by HMRC
Income tax charge of 40% of the total value of the funds held immediately before de-registration is levied on the scheme
What are the 3 operational objectives of the FCA?
Consumer protection
Competition
Integrity of the uk financial system
What are the 8 regulatory principles of the FCA?
- Efficiency & economy
- Proportionality
- Sustainable growth
- Consumer responsibility
- senior management responsibility
- transparency
- openness and disclosure
- recognising the differences in businesses carried on by different regulated persons
