Retirement Topic 3 - The Pensions Tax Regime

Question 1

Only ‘relevant UK individuals’ can make contributions to a pension. To be a relevant UK individual you must:

Answer 1

• Be under the age of 75
• Have relevant, chargeable income from the UK in the tax year
• Be resident in the tax year
• Been resident in the UK at some point from 5 years prior of contributions date

Question 2

Pension input period

Answer 2

name given to the period that the annual allowance runs through, usually run in line with the tax year. Any contributions or growth in excess of the annual allowance during the pension input period are subject to an annual allowance charge.

Question 3

The 2 occasions where the annual allowance is not enforced:

Answer 3

• The year that the individual dies
• The year that money is withdrawn for ill health

Question 4

Tax relief given in 2 ways:

Answer 4

• Personal and stakeholder schemes – contributions are paid net of basic-rate tax, and the provider will reclaim the tax from HMRC, and if you are higher or additional then you will have an extended point at which you will start to pay your higher rate band of tax rather than reclaiming the tax like basic rate does
• Occupational – ‘net pay arrangement’ which is where the employee contribution is deducted from the gross salary before tax is calculated

Question 5

Why is it common for company directors to pay themselves a small salary (£9.5k a year)

Answer 5

so that they are within the personal allowance and pay themselves in dividends instead as this is better for tax.

Question 6

Salary sacrifice

Answer 6

where employers and employees arrange where employees will accept a lower salary (forgo bonuses) to reduce the amount of tax paid, and instead of accepting a cash bonus they ask for a bigger pension contribution instead. HMRC can be picky with this but it can be good tax mitigation.

Question 7

Annual allowance charge

Answer 7

If pension holders contribute more that the annual allowance in the pension input period, then they will be charged at their highest marginal rate on the excess contribution.

Question 8

Different ways a pension can be crystallised:

Answer 8

• Commencing pension fund withdrawal
• Commencing scheme benefits
• Taking lump sum benefits
• Reaching age 75 with uncrystallised benefits
• Paying a lump sum death benefit
• Transferring to an overseas pension scheme

Question 9

Individual protection

Answer 9

• Only available until 2017
• Was available to people who had more than £1.25m in their pot on 5 April 2014
• Gave individuals an allowance up to their fund value (max. of £1.5m)
• Could apply for both fixed protection and individual protection
• Could apply for individual protection 2016, but thresholders were lower

Question 10

Fixed protection

Answer 10

For members who did not previously protect their pension funds from going over the LTA when the ‘new’ pension scheme was released. To protect the benefits, you must have told HMRC on the prescribed form, and ceased accruing benefits in all registered schemes, and ensure that you have not enrolled onto any new schemes.

Question 11

Defined-benefit schemes tax treatment

Answer 11

• If member dies before age 75, lump sum is paid tax-free
• Must be paid within 2 years to receive the benefit
• If the payment is made after 2 years, the benefit is taxable as income through PAYE
• Scheme pension is taxable as the recipient’s income regardless of the date of death

Question 12

Defined-contribution scheme tax treatment

Answer 12

• If member dies before age 75, benefits can be taken tax-free within 2 years of death
• After this, benefits are taxable via PAYE
• If a scheme member of a drawdown or annuity dies before age 75, income or lump sum paid entirely tax-free

Question 13

Pension-commencement lump sum (PCLS)

Answer 13

the amount that can be taken out of the current pensions tax free. This is the 25% tax-free withdrawal that can be made by scheme members whenever they wish to.

Question 14

PCLS recycling is when

Answer 14

a member will take their PCLS and reinvest it into another pension in order to still receive the tax benefits.

Question 15

Tax treatment of retirement income and additional lump sum withdrawals

Answer 15

• All income from any pension is treated as earned income
• Lump-sums after the PCLS are also treated as income at the marginal rate of income
• Pension credit payments are tax-free

Question 16

Protecting pre-A-day pension funds

Funds built up above the LTA before the new rules were enforced meant that people could protect their benefits by applying for

Answer 16

transitional protection

Question 17

2 options for transitional protection (LTA charge):

Answer 17

• Primary
• Enhanced

Question 18

Primary transitional protection:

Answer 18

• Individuals with benefits over £1.5m on 5 April 2006 could apply
• It increased the individual’s ongoing lifetime allowance in proportion of the amount it was over the LTA on 6 April 2006
• This would allow the member to stay active in the scheme

Question 19

Enhanced transitional protection

Answer 19

• For members who ceased active membership of approved pension schemes before A-day – they had built benefits but were no longer accruing them
• This protection meant that assuming the member was no longer part of any registered scheme after 5 April 2006, ALL benefits that will be paid are paid tax-free
• This was for any pre-A-day benefits regardless of if they went over the LTA or not
• Member can revoke their choice whenever by signing up to a new registered scheme

Question 20

Qualifying recognised overseas pension scheme (QROPS)

Answer 20

• Overseas pension arrangement that can accept transfer from UK pension scheme
• Must meet HMRC requirements, which state that overseas scheme must be regulated as a pension scheme in the country that it is established and the QROPS administrator must report to HMRC within a specific timeframe
• Since 9 March 2017, a check will also be in place to ensure that no overseas transfer charge applies, which is a 25% charge